Individual Retirement Plans

<span style="font-weight: 400;">Final regulations released in 2024 offer significant flexibility when an account owner names multiple beneficiaries.  In these cases, when the original owner fails to take their full RMD prior to death, the beneficiaries can structure the RMD as they see fit.</span><br /> <br /> <span style="font-weight: 400;">In other words, the RMD can be distributed to any beneficiary.<a href="#_ftn1" name="_ftnref1">¹</a></span><span style="font-weight: 400;">  One single beneficiary could take the entire RMD or the RMD can be divided in any way among the multiple beneficiaries.  </span><br /> <br /> <b>Planning Point</b><span style="font-weight: 400;">: Because these distributions are fully taxable—and beneficiaries may be in different tax brackets.  It may be beneficial to allocate more of the RMD to beneficiaries in the lowest tax brackets.</span><br /> <br /> <span style="font-weight: 400;">Under prior law, many believed that each beneficiary was required to take their proportionate share of the total RMD, based on each beneficiary’s interest in the decedent’s retirement accounts.</span><br /> <br /> <span style="font-weight: 400;">A special rule now applies in cases where a decedent names multiple beneficiaries and also has multiple accounts.<a href="#_ftn1" name="_ftnref1">²</a></span><span style="font-weight: 400;">  For example, assume a situation where an individual has two IRAs.  If they wish to provide for multiple beneficiaries without each knowing what the other received, they could simply name different beneficiaries to different accounts.</span><br /> <br /> <span style="font-weight: 400;">The IRS has created a special rule for these situations.  The special rule applies if (1) the original owner dies before taking their full RMD for that year, (2) had multiple retirement accounts and (3) the beneficiary designations with for all of those accounts are not identical.</span><br /> <br /> <span style="font-weight: 400;">In this case, each of the individual’s accounts must distribute an amount that is proportionate to the entire account balance.  That’s true regardless of whether the original owner had taken part of their RMD for the year from one of the accounts.</span><br /> <br /> <span style="font-weight: 400;"><strong>Example:</strong> Assume Peter died with two IRAs, one valued at $100,000 and the other at $25,000.  He names his two children as equal beneficiaries to the $100,000 IRA.  He names his two nephews as equal beneficiaries to the $25,000 IRA.  He had not yet taken his annual RMD when he passed away.  Based on a total account balance of $125,000, 80% of the RMD must come from the $100,000 IRA and 20% from the $25,000 IRA.</span><br /> <br /> <b>Planning Point:</b><span style="font-weight: 400;"> It is fairly easy for each beneficiary to calculate how much the others inherited.  Because of this rule, clients with health issues or serious privacy concerns may wish to consider taking their RMD earlier in the year to reduce the risk that their account values and beneficiary choices will become generally known to all account beneficiaries.</span><br /> <p style="text-align: center;"><strong>Automatic Waiver for Beneficiaries</strong></p><br /> <span style="font-weight: 400;">Account beneficiaries who failed to take the original account owner’s RMD by December 31 would have been subject to the 25% penalty for failure to take the RMD on time.  Recognizing that beneficiaries who inherit accounts late in the year may face administrative and other difficulties, the final regulations retain the automatic waiver of the excise tax that applies in the case of an individual who had a minimum distribution requirement in a calendar year and died in that calendar year before taking their RMD.  </span><br /> <br /> The final regulations offer even more flexibility by extending the deadline for the beneficiary to take the missed RMD and be eligible for the automatic waiver. The new deadline is the later of (1) the beneficiary's tax filing deadline for the tax year that begins with or within the calendar year in which the individual died and (2) December 31 of the following calendar year.<a href="#_ftn1" name="_ftnref1">³</a><br /> <br /> <strong>1.    </strong>Treas. Reg. §1.401(a)(9)-5(c).<br /> <br /> <strong>2.    </strong>Treas. Reg. §1.408-8 (e)(4)<strong><b>.</b></strong><br /> <br /> <strong>3.    </strong>Treas. Reg. § 54.4974-1.

<div class="Section1">Prior to TRA &rsquo;84, the IRC provided for the issuance of retirement bonds.<a href="#_ftn1" name="_ftnref1">¹</a> These bonds were issued by the U.S. government, with interest to be paid on redemption. Sales of these bonds were suspended as of April&nbsp;30, 1982.<a href="#_ftn2" name="_ftnref2">²</a> Subsequently, the Treasury Department announced that existing bonds could be redeemed by their holders at any time without being subject to an early distribution penalty ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>).<a href="#_ftn3" name="_ftnref3">³</a> Existing bonds also can be rolled over into other individual retirement plans under rules applicable to rollovers from individual retirement plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409, as in effect prior to repeal by TRA &rsquo;84.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treasury Release (4-27-82).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treasury Announcement (7-26-84).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409(b)(3)(C), prior to repeal.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note: <em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3691">3691</a> for a discussion of the substantial changes the SECURE Act made to the distribution rules governing IRAs inherited by non-spouse beneficiaries. The rules below apply to tax years beginning before 2020.<div class="Section1"><br /> <br /> Prior to 2020, the minimum distribution requirements that applied after the death of an IRA owner depended on whether the IRA owner died before (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3688">3688</a>) or after (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3689">3689</a>) the required beginning date.<br /> <br /> Distributions generally were treated as having begun in accordance with the minimum distribution requirements under IRC Section&nbsp;401(a)(9)(A)(ii). If distributions irrevocably (except for acceleration) began prior to the required beginning date in the form of an annuity that meets the minimum distribution rules, the annuity starting date would be treated as the required beginning date for purposes of calculating lifetime and after death minimum distribution requirements.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-10; Treas. Reg. &sect;&nbsp;1.408-8, A-1.<br /> <br /> </div></div><br />

<div class="Section1">An IRA offers tax-free build up on contributions. The earnings on a traditional IRA are tax deferred to the owner; that is, they are not taxed until the owner begins receiving distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>). The earnings on a Roth IRA may or may not be taxed upon distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>). Like a trust that is part of a qualified plan, an individual retirement account is subject to taxes for its unrelated business income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3974">3974</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4098">4098</a>).<div class="Section1"><br /> <br /> Tax deferral is lost if an individual engages in a prohibited transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>) or borrows under an individual retirement annuity. The loss occurs as of the first day of the tax year in which the prohibited transaction or borrowing occurred.<a href="#_ftn1" name="_ftnref1">¹</a> For an account established by an employer or association of employees, only the separate account of the individual loses its deferred status.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Prohibited transactions include: borrowing money from the IRA, selling property to it and using IRA assets for personal use or as security for a personal loan. Additionally an IRA is prohibited from investing in collectibles (e.g. artwork, antiques, stamps) and life insurance.<br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e); Treas. Reg. &sect;&nbsp;1.408-1.<br /> <br /> </div></div><br />

<div class="Section1">Sequence of returns risk is a market volatility issue surrounding the order in which returns on a taxpayer’s investments occur when the taxpayer is taking distributions or withdrawals from the portfolio.</div><br /> <div class="Section1"><br /> <br /> Essentially, if a greater proportion of low or negative returns occur during the early years of retirement, when taxpayer is taking withdrawals, the taxpayer’s overall returns are going to be lower than if those negative or low returns occurred at a later point in the taxpayer’s (and the investment’s) lifetime. Mathematically, this is because the withdrawal of a fixed dollar amount from a portfolio when the portfolio value is down requires the liquidation and distribution of a larger percentage of the portfolio than would be required when the portfolio value is high. These early low (or negative) returns and distributions have a larger impact on the compounded value of the portfolio if they occur in early years. Negative returns could even cause a portion of the principal investment to be lost.<br /> <br /> Even if the return is simply lower than average in the early years while distributions are being taken, the investment will generate an overall lower return because the investment will gain less value early on, meaning there will be a lower account value to generate growth even in later, higher return periods.<br /> <br /> When the taxpayer is making withdrawals from his or her investment accounts, the risk of outliving the retirement assets is magnified when negative returns occur in early years.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Financial planners modeling sequence of returns risk for their clients can illustrate the potential impact of (1) reducing market volatility of the overall portfolio, (2) reducing withdrawal amounts in early years or delaying withdrawals from the portfolio in down markets, and (3) maintaining a balanced portfolio so that withdrawal amounts can be paid from assets with a stable asset value rather than from selling volatile assets in a depressed market – as strategies to mitigate the potential impact of sequence of returns risk.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Distributions from traditional and Roth IRAs are not subject to the 3.8 percent net investment income tax (also known as the Medicare contribution tax) imposed under the Affordable Care Act. The tax equals 3.8 percent of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount ($200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> IRC Section 1411 specifically excludes distributions from both traditional and Roth IRAs and other qualified plans from the definition of “net investment income.”<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> While taxable distributions from traditional IRAs are not subject to the net investment income tax, they do increase a taxpayer’s modified adjusted gross income (MAGI) for the year. A higher MAGI may expose taxpayer’s other investment income (or increase taxpayer’s exposure) to this 3.8 percent tax. Planners should consider the effect of an IRA distribution on a client’s MAGI and exposure to the net investment income tax.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRS Publication 550 (2018).<br /> <br /> </div>

<div class="Section1">Contributions to both a traditional IRA and Roth IRA must be made by the tax filing deadline for the tax year in question, not including extensions. For example, a taxpayer who wishes to contribute to an IRA must do so prior to the federal tax filing deadline of the following year. This rule applies whether the IRA is an existing or new plan.</div><br /> <div class="Section1"><br /> <br /> With respect to traditional IRAs, contributions may be deducted for that tax year if the contribution is made on account of that year. This applies both to contributions to individual plans and contributions to spousal plans.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A postmark is evidence of the timeliness of the contribution.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 219(f)(3), 408A(c)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Let. Ruls. 8633080, 8611090, 8536085.<br /> <br /> </div>

<div class="Section1">A SIMPLE (which stands for Savings Incentive Match Plan for Employees) IRA plan is a simplified, tax-favored retirement plan offered by small employers that provides employees with a simplified method to contribute toward their retirement savings. Employees may choose to make salary reduction contributions (aka elective deferrals) and the employer is required to make either matching or nonelective contributions. Contributions are made to an IRA set up for each employee that meets certain vesting, participation, and administrative requirements described below.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> A SIMPLE IRA plan may permit contributions only under a <em>qualified salary reduction arrangement</em>, which is defined as a written arrangement of an &ldquo;eligible employer&rdquo; (defined below) under which:<br /> <blockquote>(1)&nbsp;&nbsp; employees eligible to participate may elect to receive payments in cash or<br /> contribute them directly to a SIMPLE IRA per a salary deferral;<br /> <br /> (2)&nbsp;&nbsp; the amount to which such an election applies must be expressed as either a percentage of compensation or as a dollar amount, but in any case cannot exceed $16,500 per year (for 2025 (projected)), up from $16,000 per year for 2024<a href="#_ftn2" name="_ftnref2">²</a>);<br /> <br /> (3)&nbsp;&nbsp; the employer must make matching contributions or nonelective contributions to the account according to one of the formulas described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3707">3707</a>; and<br /> <br /> (4)&nbsp;&nbsp; no contributions other than those described in (1) and (3) may be made to the account.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> Certain lower income taxpayers may be eligible to claim the saver&rsquo;s credit for elective deferrals to a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3648">3648</a>).<br /> <p style="text-align: center;"><strong>Elective Deferral and Catch-up Contributions</strong></p><br /> The amount contributed via an elective deferral cannot exceed $16,000 to 2024.<a href="#_ftn4" name="_ftnref4">⁴</a> A SIMPLE IRA plan, however, may permit catch-up contributions by participants who reach age 50 (or over) by the end of the plan year.<a href="#_ftn5" name="_ftnref5">⁵</a> The limit on catch-up contributions to SIMPLE IRAs is the lesser of (a) a specified dollar limit, or (b) the excess (if any) of the participant&rsquo;s compensation over any other elective deferrals for the year made without regard to the catch-up limits.<a href="#_ftn6" name="_ftnref6">⁶</a> The dollar limit is $3,500 in 2023-2025 (projected) and $3,000 in 2016-2022.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> A SIMPLE IRA will not be treated as violating any of the applicable limitations of<br /> Section&nbsp;408(p) merely on account of the making of (or right to make) catch-up contributions, provided a universal availability requirement is met.<a href="#_ftn8" name="_ftnref8">⁸</a> <em><em>See</em></em> <a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p9-pps/pltypfea/401k/Pages/3739-00-tf1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a> for details on the requirements for catch-up contributions.<br /> <br /> Elective contribution amounts made under a SIMPLE IRA plan are counted in the overall limit ($23,500 in 2025 (projected), $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, and $19,000 in 2019) on elective deferrals by any individual.<a href="#_ftn9" name="_ftnref9">⁹</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a> for the definition of &ldquo;elective deferral.&rdquo; Thus, for example, an individual under age 50 who defers the maximum of $16,500 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $7,000 in 2025 (projected) to the 401(k) plan.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Catch-up contributions are not subject to the limits of IRC Section 402(g) and do not reduce an individual&rsquo;s otherwise applicable deferral limit under any other plan.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <p style="text-align: center;"><strong>Definitions</strong></p><br /> An arrangement will not be treated as a <em>qualified salary reduction arrangement</em> if the employer, or a predecessor employer, maintained another qualified plan (including a 403(a) annuity, a 403(b) tax sheltered annuity, a SEP, or a governmental plan other than an IRC Section&nbsp;457 plan) under which contributions were made or benefits accrued for service during any year in which the SIMPLE IRA plan was in effect. But if only employees <em>other than</em> those covered under a collectively bargained agreement are eligible to participate in the SIMPLE IRA plan, this rule will be applied without regard to a collectively bargained plan.<a href="#_ftn12" name="_ftnref12">¹²</a> Also, for purposes of this rule, transfers, rollovers, or forfeitures are disregarded except to the extent that forfeitures replace otherwise required contributions.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> Only an <em>eligible employer</em> may adopt a SIMPLE IRA plan. An &ldquo;eligible employer&rdquo; is defined as an employer who employed no more than 100 employees earning at least $5,000 from the employer during the preceding year.<a href="#_ftn14" name="_ftnref14">¹⁴</a> For purposes of this limitation, <em>all</em> employees employed at any time during the calendar year are taken into account, even those who are excludable or are ineligible to participate. Furthermore, certain self-employed individuals who receive earned income from the employer during the year must be counted for purposes of the 100-employee limitation.<a href="#_ftn15" name="_ftnref15">¹⁵</a> An employer who maintains a plan in which only collectively bargained employees may participate is not precluded from offering a SIMPLE IRA to its noncollectively bargained employees.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> Generally, an eligible employer who ceases to be eligible after having established and maintained a SIMPLE IRA plan for at least one year will, nonetheless, continue to be treated as eligible for the following two years.<a href="#_ftn17" name="_ftnref17">¹⁷</a> But special rules apply where a failure to remain eligible (or to meet any other requirement of IRC Section&nbsp;408(p)) was due to an acquisition, disposition, or similar transaction involving another eligible employer.<a href="#_ftn18" name="_ftnref18">¹⁸</a><br /> <br /> <em>Compensation</em>, for purposes of most of the SIMPLE IRA provisions, includes wages (as defined for income tax withholding purposes), elective contributions made under a SIMPLE IRA plan, and elective deferrals, including compensation deferred under an IRC Section&nbsp;457 plan.<a href="#_ftn19" name="_ftnref19">¹⁹</a> A self-employed individual who is treated as an employee may be a participant in a SIMPLE IRA plan; for this purpose, &ldquo;compensation&rdquo; means net earnings from self-employment, prior to subtracting the SIMPLE IRA plan contribution.<a href="#_ftn20" name="_ftnref20">²⁰</a> An employee&rsquo;s elective deferrals under a 401(k) plan, a SAR-SEP, and a Section&nbsp;403(b) annuity contract are also included in the meaning of compensation for purposes of the 100-employee limitation (i.e., the $5,000 threshold) and the eligibility requirements.<a href="#_ftn21" name="_ftnref21">²¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(1); Notice 98-4, 1998-1 CB 269; General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p.&nbsp;140 (the &ldquo;1996 Blue Book&rdquo;).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(2); Notice 98-4; IR-2011-103, IR-2013-86, IR-2014-99, IR-2015-118.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(p)(2)(A)(ii), 408(p)(2)(E).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;414(v).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;414(v)(2)(A).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IR-2015-118, Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;414(v)(3); <em><em>see</em></em> Prop. Treas. Reg. &sect;&nbsp;1.414(v)-1(d).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;402(g)(3)(D); Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; IRC &sect;&nbsp;414(v)(3)(A).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(2)(D).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(2)(C)(i).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(2)(D)(i).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(2)(C)(i)(II).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(10).<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(6)(A).<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(6)(A)(ii).<br /> <br /> <a href="#_ftnref21" name="_ftn21">21</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> </div></div><br />

<div class="Section1">Contributions under a SIMPLE IRA plan may be made only to a SIMPLE IRA. Prior to 2016, a SIMPLE IRA could receive only contributions under a SIMPLE IRA plan and rollovers or transfers from another SIMPLE IRA account.<a href="#_ftn1" name="_ftnref1">¹</a> However, the Protecting Americans Against Tax Hikes Act of 2015 (PATH) eliminated this prohibition, so that a SIMPLE IRA may now accept rollover contributions from traditional IRAs, SEP-IRAs, 401(k)s, 457(b) plans and 403(b) plans so long as the SIMPLE IRA has been open for at least two years.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> All contributions to a SIMPLE IRA account must be fully vested and may not be subject to any prohibition on withdrawals, nor conditioned on their retention in the account.<a href="#_ftn3" name="_ftnref3">³</a> The early distribution penalty on withdrawals, however, is increased to 25 percent during the first two years of participation (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3709">3709</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The <em>participation</em> requirements for SIMPLE IRAs state that all nonexcludable employees who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the year must be eligible to make the cash or deferred election (if the matching formula is used) or to receive nonelective contributions (if the nonelective formula is used).<a href="#_ftn5" name="_ftnref5">⁵</a> Of course, employers are free to impose less restrictive eligibility requirements, such as a $3,000 compensation threshold, but they may not impose more restrictive ones.<a href="#_ftn6" name="_ftnref6">⁶</a> The $5,000 threshold compensation amount is not indexed for inflation. Nonresident aliens who received no U.S. income and employees subject to a collective bargaining agreement generally are excludable employees for purposes of the participation requirement.<a href="#_ftn7" name="_ftnref7">⁷</a> An employee who participates in another plan of a different employer may participate in a SIMPLE IRA plan, but will be subject to the aggregate limit of $23,500 (in 2025 projected) on elective deferrals.<a href="#_ftn8" name="_ftnref8">⁸</a> An employer who establishes a SIMPLE IRA plan is not responsible for monitoring compliance with this limitation.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Tax-exempt employers and governmental entities are permitted to maintain SIMPLE IRA plans. Excludable contributions may be made to the SIMPLE IRA of employees of tax-exempt employers and governmental entities on the same basis as contributions may be made to employees of other eligible employers.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Related employers (i.e., controlled groups, partnerships or sole proprietorships under common control, and affiliated service groups) must be treated as a single employer for purposes of the SIMPLE IRA rules, and leased employees will be treated as employed by the employer. Consequently, all employees (and leased employees) of an employer who satisfy the eligibility requirements (<em><em>see</em></em> below) must be permitted to participate in the SIMPLE IRA of a related employer.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> The administrative requirements for SIMPLE IRA plans state that an employer must deposit elective employee contributions (elective deferrals) within 30 days after the last day of the month in which the amounts would otherwise be payable to the employee in cash, and that employer&rsquo;s matching and nonelective contributions must be made no later than the filing date for the return for the taxable year (including extensions).<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> Employees must have the right to terminate participation at any time during the year; but the plan may preclude the employee from resuming participation thereafter until the beginning of the next year.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> Generally, each employee must have 60 days before the first day of any year (and 60 days before the first day the employee is eligible to participate) to elect whether to participate in the plan, or to modify his deferral amount.<a href="#_ftn14" name="_ftnref14">¹⁴</a> A SIMPLE IRA plan must be maintained on a calendar year basis.<a href="#_ftn15" name="_ftnref15">¹⁵</a> The IRS apparently has adopted a requirement that a plan be adopted not later than October&nbsp;1 of the year for which the plan is established, but states that the October&nbsp;1 requirement &ldquo;does not apply to a new employer that comes into existence after October&nbsp;1 of the year the SIMPLE IRA Plan is established if the employer establishes the SIMPLE IRA Plan as soon as administratively feasible after the employer comes into existence.&rdquo;<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> <em><em>See</em></em> <a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/simpira/Pages/3684-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3709">3709</a> regarding the tax treatment of SIMPLE IRA plan contributions, distributions, and rollovers. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3778">3778</a> regarding SIMPLE 401(k) plans.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269, A-2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; P.L. 114-113; <em><em>see</em></em> IRC &sect;&nbsp;408(p)(1)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(p)(3), 408(k)(4).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;72(t)(6).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(4)(A).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(4)(B).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(p)(5)(A), 404(m)(2)(B).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(5)(B).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(p)(5)(C).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp; Notice 98-4, 1998-1 CB 269, at K-1.<br /> <br /> </div></div><br />

<div class="Section1">Distributions from a traditional IRA generally are taxed under IRC Section&nbsp;72 (relating to the taxation of annuities).<a href="#_ftn1" name="_ftnref1">¹</a> Under these rules, a portion of the distribution may be excludable from income. The amount excludable from the taxpayer&rsquo;s income in a given year is that portion of the distribution that bears the same ratio to the amount received as the taxpayer&rsquo;s investment in the contract (i.e., nondeductible contributions) bears to the expected return under the contract. In no case will the total amount excluded exceed the unrecovered investment in the contract.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> All traditional IRAs are treated as one contract, all distributions during the year are treated as one distribution, and the value of the contract, income on the contract, and investment in the contract are computed as of the close of the calendar year with or within which the taxable year begins.<a href="#_ftn3" name="_ftnref3">³</a> Thus, the nontaxable portion of a distribution (whether from a traditional individual retirement annuity or account) is equal to the following:<br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" width="317">Unrecovered Nondeductible Contributions</td><br /> <td style="text-align: center;" rowspan="2" width="147">&times; Distribution Amount</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="317">Total IRA Account Balance + Distribution amount + Outstanding Rollovers</td><br /> </tr><br /> </tbody><br /> </table><br /> The total IRA account balance is the balance in all traditional IRAs owned by the taxpayer, as of December&nbsp;31 of the year of the distribution. The amount of any distributions made (i.e., the amounts for which the nontaxable portion is being computed) and any outstanding rollover amounts (i.e., any amount distributed by a traditional IRA within 60 days of the end of the year, which has not yet been rolled over into another plan, but which is rolled over in the following year) are added to the total IRA account balance. If it is not rolled over, the amount is not treated as an outstanding rollover.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <blockquote><em>Example:</em> Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2024 of $2,000. By the end of 2025, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600. Of the $600 received by Bill, the nontaxable portion of the distribution is equal to $500, calculated as follows:</blockquote><br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" width="281">$2,000 [total unrecovered nondeductible contributions]</td><br /> <td style="text-align: center;" rowspan="2" width="154">&times; $600 [distribution amount]</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="281">$2,400 [total IRA account balance + distribution]</td><br /> </tr><br /> </tbody><br /> </table><br /> <blockquote>Thus, Bill will be taxed on only $100 of the $600 distribution and remaining IRA account balance will be $1,800 ($2,000+$400 &ndash; $600).</blockquote><br /> Nondeductible contributions will not be excluded from gross income as investment in the contract where the taxpayer is unable to document the nontaxable basis through the filing of Form&nbsp;8606, Nondeductible IRAs (Contributions, Distributions and Basis) for the year in which such nondeductible contributions were made and the year in which they were distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3699">3699</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> An individual may recognize a loss on a traditional IRA, but only when all amounts have been distributed from all traditional IRAs and the total distributed is less than the individual&rsquo;s unrecovered basis.<a href="#_ftn6" name="_ftnref6">⁶</a> The deduction for the loss was typically a miscellaneous itemized deduction (all of which were suspended for 2018-2025 by the 2017 tax reform legislation&mdash;the IRS has yet to issue guidance that would otherwise allow this loss deduction during this time period).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Despite the pro-rata rule generally applicable to distributions from a traditional IRA, distributions after 2001 that are rolled over to a qualified plan, an IRC Section&nbsp;403(b) tax sheltered annuity, or an eligible IRC Section&nbsp;457 governmental plan are treated as coming first from all non-after-tax contributions and earnings in all of the IRAs of the owner.<a href="#_ftn8" name="_ftnref8">⁸</a> Because after-tax contributions cannot be rolled over to eligible retirement plans other than another IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3996">3996</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>), this ordering rule effectively allows the owner to rollover the maximum amount permitted. Appropriate adjustments must be made in applying IRC Section&nbsp;72 to other IRA distributions in the same taxable year and subsequent years.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The fact that IRA funds were distributed by the financial institution&rsquo;s receiver following insolvency proceedings did not change the nature of the distribution. The taxpayers were taxed on the distribution since a timely rollover was not made.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Likewise, the transfer of IRA funds by a financial institution into a &ldquo;trust account&rdquo; was a taxable distribution to the taxpayer even though the taxpayer had intended to transfer the IRA funds to another IRA and had named the account a &ldquo;trust IRA&rdquo; because the money was transferred into the trust account.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> In addition, a failed Roth IRA conversion that is not recharacterized is treated as a distribution from a traditional IRA and taxed accordingly (note that the typical Roth IRA recharacterization rules were eliminated for tax years beginning after 2017).<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> Taxpayers who were defrauded of their account balances by their investment advisor, who convinced them to make IRA rollover investments that the advisor subsequently embezzled, were liable for taxes on the amount of assets stolen because the account holders failed to take the necessary steps required to properly set up IRA rollover accounts.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> Prior to 2018, special rules applied for qualified hurricane distributions, as follows: Unless a taxpayer elects otherwise, any amount of a qualified hurricane distribution required to be included in gross income shall be so included ratably over the three year taxable period beginning with such year.<a href="#_ftn14" name="_ftnref14">¹⁴</a> If a qualified hurricane distribution is an eligible rollover distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>), it may be recontributed to an eligible rollover plan no later than three years from the day after such distribution was received ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4012">4012</a>).<a href="#_ftn15" name="_ftnref15">¹⁵</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>- Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion on the treatment of disaster distributions in later years.&nbsp; In recent years, Congress and the IRS have offered similar treatment for disaster-related distributions, including coronavirus-related distributions.<br /> <br /> Certain early distributions are subject to additional tax ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>). As to what constitutes a &ldquo;deemed distribution&rdquo; from a traditional IRA, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>. For the estate tax marital deduction implications of distributions from a traditional IRA, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3713">3713</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(d)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;72(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(d)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Notice 87-16, 1987-1 CB 446.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; <em>Alpern v. Comm.</em>, TC Memo 2000-246.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Notice 87-16, 1987-1 CB 446.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRS Pub 590-B (2017), p.&nbsp;19.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(d)(3)(H).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(d)(3)(H)(ii)(III).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; <em>Aronson v. Comm.</em>, 98 TC 283 (1992).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Let. Rul. 199901029.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; SCA 200148051.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; FSA 199933038.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1400Q; Notice 2005-92, 2005-2 CB 1165.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1400Q; Notice 2005-92, 2005-2 CB 1165.<br /> <br /> </div></div><br />