The individual retirement account, or IRA, is a deceptively simple tax-advantaged savings vehicle that advisors must become proficient at working with to successfully serve clients, according to IRA consultant Ed Slott.
There are dozens of rules governing IRAs, particularly surrounding taxation, inheritance and distribution of IRA money, said Slott, president of Ed Slott and Company, at his firm’s Instant IRA Success workshop in Las Vegas last month.
“Almost every advisor will say the same thing: We don’t give tax advice," he said. "But here’s the thing: You are tax advisors. ... If you’re touching an IRA, or a Roth IRA, you’re giving tax advice."
Presenters from Ed Slott and Company spent nearly four hours detailing 25 IRA rules they said advisors “must know,” covering relevant court cases and IRS policy statements that provide guidance for practitioners.
Here are 10 of Slott’s 25 “must know” rules for IRAs.
1. The Basics Of IRA Distributions
All traditional IRA owners face required minimum distributions (RMDs) by April 1 of the year that follows the year they turn 70 and one half.
“Because the IRS is keeping an eye out on RMDs, you want to be sure that your clients take theirs,” said Sarah Brenner, director of retirement education at Slott and Company. “Double-check IRA transactions by the end of the year." Also find out about accounts that they might have elsewhere, she added.
After the first RMD, all subsequent RMDs are required to be taken by the end of the year. So for someone who reached age 70 and a half in 2019, the account owner’s first RMD is required by April 1, 2020, and their second is required by Dec. 31, 2020. Thus, waiting until after Jan. 1, 2020 to take an initial RMD would lead to both distributions being taxed in one year.
RMD amounts are calculated using the IRS’s life expectancy calculations . While there are three different tables listing life expectancy that the IRS uses to calculate RMDs in certain cases, most IRA owners will use the Uniform Life Table, while most IRA beneficiaries will use the IRS’s Single Life Expectancy Table.