Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

This week, IRA expert Ed Slott answers questions about IRA rollover rules and trustee-to-trustee transfers.

Question 1:

As a named beneficiary of my father's Roth IRA, I am confused about why I have to pay income taxes on my required minimum distribution (RMD). My dad was 75 years old and appropriately taking his RMD. Upon his death, in January of 2009, the Roth IRA was split equally among the three named beneficiaries, all his children.

I began taking my RMD according to the lifetime table. My father had owned this Roth IRA for over the qualifying time period. I did not rename it with my name but rather as a beneficiary IRA. I appropriately have not treated this as my own IRA by making contributions to the fund. Why am I required to have income taxes taken out? Nobody can seem to justify this.

Thank you for your time,

Amy Willow

Answer:

I am also confused. You say this is a Roth IRA and you say that your father was taking his RMDs from this account. A Roth IRA has no RMDs for the account owner while he is alive. So, you either have an inherited traditional IRA, which would have taxable distributions which is why your father was taking RMDs from the account, or you have an inherited Roth IRA, which would have tax-free distributions and your father was taking distributions that were not required. You should contact your custodian to insure that the inherited account was set up correctly. You might want to get your tax advisor involved as well to determine what the problem may be.

Question 2:

I have a few questions for you.

I have a 401(k) with a former employer that has pre-tax with matching, and Roth contributions in it. I am under the impression that because of the Roth designation of this account, the earnings from the Roth contributions are exempt from any taxes when I retire. Is that correct?  

I have a 401(k) with my current employer that has pre-tax, with matching, and post-tax contributions.  I am under the impression that because these are considered post-tax contributions and do not have a Roth designation, that the earnings will be subject to ordinary income taxes. Correct?

It appears in a few articles I have read that I am able to roll these post-tax contributions over into my Roth IRA with only tax implications on the earnings and not on the basis.   In doing this rollover, that amount is not subject to the $5,000 normal contribution limit of my Roth IRA.  Is that correct?

I also read further that there is a 1-year waiting period to do another similar rollover.  Because of this, it appears to me I can contribute to these post-tax contributions in my 401(k), and then every other year I can roll that over to my Roth IRA.  In doing so I will pay taxes on the gains during that time, but that will funnel more money into my Roth IRA where it will have less operating expenses. Do I understand this right?  I cannot find any information that says otherwise. 

Thanks,

Tim Cathcart

Answer:

Question 1: Distributions from the 401(k) Roth IRA should be income tax-free so long as you meet all of the requirements. Those funds can be moved to a Roth IRA when you separate from service.

Question 2: You are correct that the earnings on the after-tax contributions will be subject to income tax when they are withdrawn.

Question 3: When you have pre- and after-tax contributions in the plan, distributions must generally come out using the pro-rata rule. The pro-rata rule states that when an account contains both pre- and after-tax funds, then each dollar withdrawn from the account will contain a percentage of tax-free and taxable funds based on the percentage of after-tax funds to the entire account balance. According to IRS, you generally can no longer just withdraw the non-deductible funds and pay no income tax.

Question 4: The once-per-year rule applies to IRA-to-IRA rollovers. It does not apply to rollovers from plans to IRAs. You can only take funds out of a 401(k) when the plan allows. You generally do not have the ability to empty out your plan every two years.

Question 3:

Can you do a trustee-to-trustee transfer on an employer plan, after retirement, where say 50% is deposited in a Roth IRA and 50% in a traditional IRA?

Answer:

An employer plan is required to allow you to do a direct rollover of plan funds to another retirement account. However, they are not required to allow you to do a direct rollover to more than one account. When you retire, you can split your 401(k) balance between a traditional IRA and a Roth IRA, but you may have to take a distribution payable to you to accomplish the second rollover. If you are converting any of the money held in the regular portion of the 401(k) plan to a Roth IRA, you will have to pay income tax on the taxable amount converted.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com