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 tackles questions about rolling inherited annuities into separate IRAs and the rules and requirements regarding SEP IRAs.

Question 1:

Hello Ed and Company,

My mother recently passed away, and we three children are inheriting an annuity. Is it possible to roll each portion to an IRA to keep the money growing tax free?

Thank you,

Elena

Answer:

It is possible to split the annuity into three separate shares. You should, however, check with the annuity company to see if they will allow the split. Assuming they will, you want to have the three separate shares in inherited IRAs established for each of the three beneficiaries prior to 12/31 of the year following your mother’s death.

If that is completed on time, then each child can take their annual RMDs (required minimum distributions) using their attained age in the year following the year of your mother's death.  If the 12/31 date is missed, then each child's annual RMD would be based on the age of the oldest beneficiary.

You want to insure that a check is not issued payable to a beneficiary. If that happens then there cannot be an inherited IRA and the full amount will be fully taxable. The best way to go from your mother's IRA to inherited IRAs is to do a trustee-to-trustee transfer.  One other thing: When establishing the inherited IRAs make sure your mother's name appears in the title.

Question 2:

Hello Ed Slott and Company,

I have been reading through various IRS publications to no avail. Repeated Google searches have proved fruitless as well. I recently sent a letter to the Internal Revenue Service Commissioner. As I have not received any information yet, I was hoping you might be able to shed some light on the following question:

A registered sales manager makes about $32,000 per year. He contributes the maximum each year to his 401(k); the 401(k) contributions come from his earnings as sales manager. 

In addition to the aforementioned income, he also has commission-based income of $100,000 to $140,000 per year from the same company. 

He is paid as a “statutory employee” per his 2010 Form W-2. 

Could he, in such circumstances, contribute to a SEP [in addition to the 401(k) contributions mentioned above] from his commission-based earnings? Please note: these earnings are reported on his tax return as Schedule C, but they do show on his 2010 Form W-2. 

Any insight you could provide is much appreciated.

Sincerely,

Meg

Answer:

You have to first determine if the client is self-employed or not. Only a truly self-employed individual can establish a SEP IRA.

Question 3:

I have a 401(k) with substantial after-tax contributions (both pre 1986 and post 1987 after-tax contributions). The plan also holds company stock contributed by my employer on a pre-tax basis and company stock purchased with my contributions on both a pre- and post-tax basis. My 401(k) custodian tracks all of this cost basis information separately for each type of contribution (pre 1986, post 1987, before tax, after tax, company contribution earnings etc.). I am 57 years old and I retired from my employer after my 55th birthday. 

I plan to take an NUA (net unrealized appreciation) distribution of the company contributed stock in 2013. My after-tax contributions will exceed the cost basis of the stock that I am taking out as an NUA distribution, so I understand that I will not owe any taxes in 2013 on the NUA distribution, that the cost basis of these shares will be zero, and that the amount of my after-tax contributions in my 401(k) will be reduced by the basis of the NUA shares that I withdrawal. 

I would like to contribute the remaining after-tax contributions in my 401(k) to a Roth IRA and roll over the remaining pre-tax contributions to a traditional IRA. I called the IRS and asked about this. The agent that I spoke with reviewed Publication 575 and told me that, as far as he could tell, as long as the 401(k) custodian can separate out the after-tax contributions, I could roll them over to a Roth IRA without any tax consequences.  Am I allowed to do this? 

Answer:

The cost basis of the company stock in the 401(k) plan is determined by the purchase price when purchased by the plan, not by the pre- and after-tax amounts you have in the plan.  Some shares in your account will be taxable and some may not be, depending on whether they are purchased with pre-tax contributions or after-tax contributions.  To avoid an early distribution penalty of 10% on the taxable amount of the NUA distribution, you must be age 55 or older in the year you separated from service.

When the plan has both pre- and after-tax dollars, you may have to use the pro rata rule for your distributions. Here is a good website to learn more about the pro-rata rule.

In order to use NUA, distributions from the plan must not be taken from the date of separation until the year you take a lump sum distribution. Separation from service is a triggering event. You will have another triggering event when you reach age 59 1/2.  As you can tell this is a very complex strategy and we strongly recommend you find a knowledgeable adviser to help guide you through these rules.

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