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These answers are informational only and are not intended to address all possible situations that might arise with respect to the question asked. You should check IRS Publication 590 for more information (keep in mind that the IRS does not stand behind any advice they give) and check with a qualified advisor before doing IRA transactions and especially before trying to correct something that may be wrong. Any tax advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax or penalties.

Click each question for corresponding answer.

1. Can I make a contribution to an IRA or Roth IRA?

You must have earned income in order to make a contribution. The safe harbor definition of earned income is W-2 income. You can contribute the amount of your earned income or the contribution limit, whichever is less. Any taxpayer with earned income can make an IRA contribution with the following exception. If your income exceeds certain limits you will not be able to make a Roth IRA contribution. The income limits will increase each year for inflation. See IRS Publication 590-A for the current contribution and income limits. If you are age 50 or over you are eligible to make an additional catch-up contribution in the amount of $1,000.

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2. Can I contribute to an IRA or Roth IRA on behalf of my spouse who does not work or who makes less than the contribution limits?

Yes, you can contribute on behalf of a non-working spouse. The contribution rules are the same for the non-working spouse as they are for the working spouse (see above).

3. Is my traditional IRA contribution deductible?

If neither you nor your spouse is covered by an employer retirement plan, your IRA contribution will be 100% deductible, regardless of your income. If either one of you is covered by a plan, your contribution may not be deductible or it may be partially deductible. The deductibility limits change each year. See IRS Publication 590-A for the current deductibility limits. There is a box on your W-2 Form from your employer that will tell you if you are considered to be covered by an employer plan. You will need to report any non-deductible traditional IRA contributions on Form 8606 which is filed with your tax return.

4. Can an IRA or Roth IRA contribution be made for a deceased person in the year of death?

IRS says no because a dead person has no need to fund a retirement plan. Who can argue with that logic?

5. Do I have to take distributions from my traditional IRA?

Yes. An IRA, SEP or SIMPLE owner must begin taking distributions for the year they turn age 72. It does not matter if you are still working or if you do not want to touch the money, you still must take a required distribution. Your IRA custodian is required to notify IRS that you have to take a distribution, but they are not required to tell IRS how much you should withdraw. The custodian is required to tell you how much you should withdraw or they must offer to do the calculation for you. You will get that letter from your IRA custodian in January each year.

A non-spouse IRA beneficiary who is named on the beneficiary form (not one who inherits through the estate) must generally empty the inherited IRA account by December 31 of the year following the year of death. A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) does not have to start taking distributions until the IRA owner would have been 72. An IRA custodian can limit the distribution options for a beneficiary. You should check the IRA agreement for each account you inherit to see what your distribution options are for that account. A non-person beneficiary (estate, charity, etc.) and a trust beneficiary have special distribution rules. See IRS Publication 590-B or the IRA account agreement form for more information on the distribution rules for beneficiaries.

Any required distribution that is not taken is subject to a 50% penalty of the amount not taken and is reported on Form 5329 for the year the distribution was missed.

6. Can I convert my IRA or employer plan to a Roth IRA?

All funds in traditional IRAs, SEP IRAs, and employer plans such as 401(k)s are eligible to be converted to a Roth IRA. Funds in a SIMPLE IRA can also be converted AFTER the employee has participated in the SIMPLE plan for two years. A conversion before that date will be subject to a 25% penalty tax on the amount withdrawn AND the funds are not eligible for transfer to any other type of retirement account except another SIMPLE. To do a conversion of employer plan funds, you must be eligible to take a distribution from the plan.

7. When can I take money out of my Roth IRA? Will I have to pay any taxes or penalties on what I withdraw?

You can take your basis out of a Roth IRA at any time. Your basis is amounts you have contributed, amounts you have converted, or certain amounts you have rolled over from an employer Roth account. Distributions of your basis will not be taxed as you paid tax on those amounts when they went into your Roth. A distribution from your Roth is considered to first come from contributions, then converted amounts, and lastly from earnings.

You cannot take a tax free distribution of earnings until 5 years after you have established your first Roth IRA AND are over the age of 59 ½, are dead, disabled, or are taking out the funds under the first time home buyer exception. In addition, if you are under the age of 59 ½, the 10% early distribution penalty will apply.

You could also be subject to the 10% early distribution penalty on the distribution of converted amounts if the conversion was done less than five years ago AND you are under the age of 59 ½ at the time of the withdrawal. The penalty will be owed on the amount of the converted dollars withdrawn, not on the total converted amount (unless you withdraw the total converted amount).

8. Can I name a trust as the beneficiary of my IRA or Roth IRA?

Yes, you can name a trust as the beneficiary of your IRA or Roth IRA. BUT, do not do this unless you understand all of the ramifications of having a trust instead of an individual inheriting the IRA. Always consult with an expert IRA advisor before taking this step. NEVER, NEVER, NEVER move your IRA assets into the trust or retitle your IRA into the name of the trust. Both of those actions are taxable events and you will owe income tax on the entire balance in your IRA and you will no longer have an IRA!! The trust should simply be named as the beneficiary on the beneficiary form.

9. Who takes the year of death required distribution from an IRA?

Any remaining amounts of the year of death required distribution MUST go to the beneficiary. The distribution never goes to the decedent or to the estate, unless the estate is the beneficiary. The RMD for the year of death is what the deceased IRA owner should have taken. Any required distributions that are not taken will be subject to the 50% penalty and are reported on Form 5329 by the beneficiary for the year the distribution was missed.

10. I just inherited an IRA or Roth IRA from my spouse. What do I do now?

Under the tax code you have three options, but your IRA custodian may limit these options. You will need to check with the custodian to see what your options are.

1. You can leave the IRA where it is and remain a beneficiary. This is generally not recommended. When you start taking distributions they will be accelerated, and your beneficiaries may not be able to stretch distributions over their lives when they inherit from you. However, it could be beneficial for a younger spouse who will need funds from the IRA to live on before attaining age 59 ½. Distributions from the inherited IRA will not be subject to the 10% early distribution penalty. Required distributions will begin in the year the account owner, not you, would have attained age 72 or in the year after death if the owner was already 72.

2. You can leave the IRA where it is and have it retitled in your own name and social security number. Some IRA custodians may not allow you to do this, but it is a simple way for you to get the IRA in your own name. The account is treated as if it had always been yours and distributions to you will begin when you turn 72 or in the year after death of the account owner if you are already 72.

3. You can move the funds to an IRA in your own name. This can be either a new account or an IRA that you already had in your name. If you are under the age of 59 ½, any funds you take out of an account you own will be subject to the 10% early distribution penalty. The account is treated as if it had always been yours and distributions to you will begin when you turn 72 or in the year after death of the account owner if you are already 72.

Whatever option you use, always be sure to name your own beneficiaries on the account you have inherited. Any required distributions that are missed will be subject to the 50% penalty and are reported on Form 5329 for the year the distribution was missed.

11. I just inherited an IRA from someone who is not my spouse. What do I do now?

You will have to check with the IRA custodian to see what your options are under each IRA account you have inherited. Custodians can limit your options.

Under the SECURE Act, for deaths in 2020 and later most nonspouse beneficiaries are subject to a ten-year payout period. The inherited IRA must be emptied by the end of the tenth year following the year of death. Eligible designated beneficiaries can still stretch distributions from inherited IRAs over their own life expectancy.

12. I just found out I was not eligible to make a Roth contribution. What do I do now?

First and foremost, you will have to remove the funds from the Roth IRA. You have three options.

1. Recharacterization - The funds can be recharacterized to a traditional IRA up to October 15th of the year after the year for which the contribution is made. You must notify both the Roth IRA and the traditional IRA custodians that you are doing a recharacterization. A net amount is recharacterized. Gains or losses on the account for the time the funds are in the account that are attributable to the contribution must also be recharacterized. The funds must be moved in a trustee-to-trustee transfer back to an IRA. Once this is done, the funds are treated as though they had always been in the IRA.

2. Excess Contribution – This option can be used either before or after the October 15th date. If it is before October 15th of the year after the year for which the contribution is made, then again a net amount must be withdrawn. The IRA custodian should be told this is a withdrawal of an excess contribution. The funds will go into your pocket and will no longer be in an IRA. Any earnings that are withdrawn will be taxable for the year of the contribution, not the year they are withdrawn.

If the October 15th date has passed, this will be your only option for removing the funds. However, you no longer have to calculate gains or losses. You only remove the amount of the contribution. This is good if you have gains in the account, bad if you have losses. You also will have to pay a 6% excess contribution penalty on the amount of the contribution that was in the account as of December 31st of the prior year. This penalty will also apply to a contribution made up to April 15th of the current year that was designated as a prior year contribution. The penalty is reported on Form 5329 which is filed with your tax return. The penalty will apply for each year that the excess amount remains in the account (that is why you need to remove it as soon as possible).

3. Carry Forward – You can carry forward the excess amount and use it up in subsequent years as contributions for those years. This is generally only a good idea for contributions when you are fairly certain that you will be eligible to make a contribution in the next year. You will still owe the 6% excess contribution penalty for each year that you have excess funds in the account.

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13. I forgot to take a required distribution or all of my required distribution or the company did not process my required distribution on time. What do I do now?

A missed distribution, even if it isn’t your fault, is subject to a 50% penalty on the amount not distributed. You should take the distribution as soon as you realize it was missed. The penalty is reported on Form 5329 for the year of the missed distribution. IRS can waive the penalty for good cause. To get the penalty waived, you must take the distribution, file Form 5329 without the penalty payment, and include a letter to IRS requesting the waiver of the penalty.

14. Do I have to take my required distribution from each account that I have?

Generally, yes. There is an exception for IRA accounts. You can calculate your distribution from each account that you have and then combine the distributions from all like accounts and take the distribution from one or any combination of those like accounts that you have. Like accounts are all accounts you own or all accounts inherited from the same person. Roth IRAs are considered their own separate category of IRA. The same exception exists for 403(b) accounts.

Under no circumstances can you take an IRA distribution from an account other than an IRA, a Roth distribution from an account other than a Roth, or an employer plan distribution from any other plan you might have.

15. Can I put my house, vacation home, condo for my child to live in while attending college, future retirement home, stocks or other property I currently own, in my IRA or Roth IRA?

No, you cannot do any of the above transactions with your IRA. You cannot engage in self dealing with your IRA. This means that you cannot enter into a transaction in your IRA that benefits you in any way other than your potential benefit from investment gains in the IRA. You also cannot transfer assets you own to your IRA. So you cannot put your house, or stocks or other assets that you already own into your IRA in exchange for IRA assets. IRA contributions must be made in cash (unless the assets going into the IRA have come from another retirement account) which is another reason why you cannot put assets you currently own into your IRA or Roth IRA.

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