Question:

If someone has a SIMPLE IRA and is interested in doing a backdoor Roth IRA conversion, does the SIMPLE IRA count under the pro-rata rule?

Answer:

The pro-rata rule that determines the taxation of a backdoor Roth IRA conversion includes all of a person’s IRAs owned as of the end of the calendar year in which it is done. This includes SEP and SIMPLE IRAs, but not Roth IRAs or inherited IRAs. Even IRAs held at different financial institutions are aggregated.

Question:

Hi Mr. Slott,

I have a dual citizenship, U.S. and The Philippines. I have an IRA and would like to have my chronically ill/disabled nephew as one of my beneficiaries. Can he be my beneficiary if he is not a U.S. citizen?

Thank you so much,

Erlinda

Answer:

Dear Erlinda,

Yes, a non-U.S. citizen can be named as beneficiary, whether the beneficiary lives in the U.S. or abroad. If the beneficiary is a nonresident alien, distributions from the inherited IRA may be subject to a 30% U.S. withholding tax, unless reduced by a tax treaty between the U.S. and the country of residence.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

In just a few days, on July 4, Trump accounts will be available. As we come down to the wire, the IRS has stepped in to provide a safe harbor to address concerns about potential gift tax issues with contributions.

The Gift Tax Issue

Contributions to Trump accounts do not qualify under the annual gift tax exclusion ($19,000 for 2026). Only gifts of “present interest” qualify. A gift of “present interest” means a gift that the recipient can immediately access and use. Trump accounts are not considered gifts of “present interest” because they cannot be accessed until the year the child turns 18.

Congress did not include a provision in the One Big Beautiful Bill Act (OBBBA) to exempt Trump accounts, like it did many years ago for section 529 plans. Unless Congress or the IRS intervened, there was concern that a gift tax return (Form 709) would be required for individuals making Trump account contributions.

The Fix

On June 29, the IRS issued Rev. Proc. 2026-25. This guidance provides a gift tax reporting safe harbor for Trump account contributions made before the year the child reaches age 18.

Under the safe harbor, if certain requirements are met, contributions made by individual donors to Trump accounts in a given year will not be subject to gift tax reporting requirements for that year.

The IRS said that a safe harbor was necessary for several reasons. For many of those who contributed to Trump accounts, the cost and other burdens of complying with gift tax reporting requirements could outweigh the anticipated financial savings benefit of making contributions. In addition, gift tax reporting compliance by Trump account contributors could dramatically increase the burden on the IRS, who would have to process gift tax returns for taxpayers who would be unlikely to ever be subject to gift, estate, or generation-skipping tax. Also, according to the IRS, the fact that nearly six million Trump accounts have already been opened means the number of gift tax returns filed annually could be expected to increase from roughly 300,000 to several million.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

When it comes to the rules governing specific workplace retirement plans like a 401(k), there are the foundational rules dictated by law, and there are “in-house rules” put into place by the plan itself. Plans can choose to be far more restrictive than what the law allows. For example, while loans are permitted to be taken from a 401(k), a specific plan can be designed to refuse all loan requests. Workplace plans can implement all sorts of restrictions that plan participants may not be aware of…until it comes time to access their funds. Plans are perfectly within their rights to do so, and any complaints will fall on deaf ears. When it comes to plan design, we like to say, “the law of the plan is the law of the land.”

In one egregious scenario, a small (20-employee) blue-collar business installed a 401(k) plan for its employees. The problem was that the business owner appeared to suffer from some level of paranoia. He was so concerned that an employee would quit and use his 401(k) funds to start a competing business that he designed the 401(k) to be incredibly restrictive when it came to withdrawals. In fact, participants could not access a penny of their retirement money – even if they separated from service – until age 65 or death.

Recently, I was contacted by a member of Ed Slott’s Elite IRA Advisor Group℠ whose successful client was preparing to retire early, at age 56, from a large medical company (approximately 300,000 employees). The client had a significant balance in her 401(k). The idea was for the client to delay a rollover of the 401(k) to her IRA until she was 59½. Until then, she would take periodic distributions from the 401(k) to cover whatever expenses she had.

On its surface, this seemed like a wise planning strategy. The advisor had done his homework and was aware of the “age 55 exception” to the 10% early withdrawal penalty. When a person leaves her job in the year she turns age 55 or older, she can take penalty-free withdrawals from the 401(k) held at that business. The age 55 exception is written into the tax law and is claimed on a taxpayer’s federal return using Form 5329. The advisor in this case also knew the age 55 exception applies to plan withdrawals only. It does not apply to distributions from an IRA, hence the need to leave the 401(k) assets where they were for a few years.

The advisor and his client contacted the 401(k) provider to explain their intentions…and their best-laid plans fell apart.

In fact, the plan design of this large 401(k) did not allow for partial withdrawals before age 59½. For anyone in the age 55 to 59½ range, the plan contained an all-or-nothing withdrawal rule. Essentially, this 401(k) legislated out the age 55 exception. Ultimately, it appeared the plan was intentionally structured this way to discourage early retirement among highly skilled employees who would otherwise be most likely to separate from service. Most of these employees have no idea how much the plan rules disadvantage them, and the plan is within its rights to do so.

It would be wise to get a handle on what your plan does and does not allow before it is too late. After all, the law of the plan is the law of the land.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

Question:

Can required minimum distributions (RMDs) from 403(b) plans be aggregated and taken from one account?

Answer:

Yes, it is allowed to aggregate RMDs from multiple 403(b) plans and take the total from one of the 403(b) accounts. However, RMDs from 401(k)s cannot be aggregated with RMDs from other 401(k)s, other types of employer plans, or RMDs from IRAs.

Question:

Hi Ed Slott Team,

I made a Roth IRA contribution for 2025. Unfortunately, I just found out that my income is too high for me to make Roth IRA contributions. Will I be penalized?

Appreciate your help!

Answer:

It is not too late to correct an excess Roth IRA contribution and avoid the 6% penalty. If you timely filed your 2025 federal income tax return, you can still do a corrective distribution (or recharacterization). If you remove the contribution and the net income attributable to it by October 15, 2026, you will not be subject to penalty. The contribution will not be taxable when distributed, but the net income attributable to it would be. There will be special reporting required, so be sure to tell your IRA custodian that you are doing a corrective distribution.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

The June 15, 2026 Slott Report described the strict barriers employees face when attempting to access their 401(k) and other plan funds while still working. One exception to those barriers is for hardship withdrawals. Plans are not required to offer hardship withdrawals, but the overwhelming majority – estimated at 80-90% – do.

If you’re a 401(k) or 403(b) plan participant, you must satisfy three conditions to qualify for a hardship withdrawal:

• Your withdrawal must be for an “immediate and heavy financial need.” Most plans allow you to satisfy this requirement only if your expense fits into one of seven “safe harbor” categories: medical expenses; home purchase costs; post-secondary educational expenses; payments necessary to prevent eviction or mortgage foreclosure; funeral expenses; expenses to repair home damage; and disaster-related expenses and losses. As an alternative to using these safe harbors, your plan can evaluate each request individually using objective standards. But that is relatively rare. 
  
• The amount you’re requesting can’t be more than is necessary to cover the expense (including any federal and state taxes and also, if applicable and the plan permits, the 10% early distribution penalty).
  
• You don’t have enough cash or other assets readily available to cover the expense.

If you’re a 457(b) plan participant, a stricter hardship standard applies: Your expense must have resulted from an “unforeseeable emergency.” This means an “extraordinary and unforeseeable circumstance” arising as a result of events beyond your control. This would include expenses due to imminent foreclosure or eviction from your primary residence, medical expenses, or funeral expenses of a spouse or dependent. However, the purchase of a home or payment of college tuition would not qualify because they are not “unforeseeable emergencies.” 457(b) hardships also must satisfy requirements similar to the second and third 401(k)/403(b) requirements.

Even if your withdrawal doesn’t qualify as a hardship withdrawal, you may still be able to tap into your workplace funds while still working. That would be the case if your plan allows withdrawals for one or more reasons that qualify as an exception to the 10% early distribution penalty for those under age 59½. One example would be withdrawals after the birth or adoption of a child. However, many plans don’t allow withdrawals due to birth or adoption or for other penalty exception reasons.

So, you can access your retirement plan funds while working if the plan allows, and you qualify for, hardship withdrawals or withdrawals for reasons that are exceptions to the 10% penalty. But keep in mind that, in either case, any pre-tax funds distributed to you will still be subject to taxes. And, if you’re under age 59½, the withdrawal may also be subject to the penalty.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

On July 4, contributions to Trump accounts, a new savings vehicle for children, will become available. In these final days before their launch, we have been getting questions from parents about exactly what they should be doing to take advantage of this new savings opportunity. Here is what parents need to know as we count down the days to the arrival of Trump Accounts:

How can I sign up my child for a Trump account?

You can sign your child up for a Trump account by completing IRS Form 4547 and submitting it by hard copy, electronic filing or through the trumpaccounts.gov website. You can also use Form 4547 to sign up for the $1,000 contribution from the federal government for children born between 2025 and 2028.

There is no cost to open an account. Trump accounts must be invested by the custodian in a diversified index fund of U.S. stocks and must minimize fees and expenses.

I’ve signed my child up for a Trump account. What’s next?

Look for an email confirming that your election to open your child’s Trump account was processed and prompting you to complete the account activation. 

Follow the instructions in the email to set up your child’s Trump account through the Trump accounts app (available in the Apple App Store and Google Play) or by visiting Trumpaccounts.gov.  If you do not have access to a mobile device, you can access the web version of the official Trump Accounts app through https://trumpaccount.com/

How will the government update me on what is going on with my child’s Trump account?

As Trump account activation begins, concerns about potential scams are growing. Families should know that the initial legitimate communications about Trump Account activation will be sent only by email from no-reply@TrumpAccounts.Treasury.gov.

Future communications will be available in the Trump accounts app. When in doubt, visit the official app. There will be no text messages or phone calls about Trump account activation. If you receive a call or text about a Trump account, do not respond. It is likely a scam. 

When will my child receive the $1,000 contribution from the government?

Starting July 4, 2026, eligible children will begin receiving the $1,000 pilot program contribution from the U.S. Department of the Treasury deposited directly into their Trump account.  

When can I contribute to my child’s Trump account?

Beginning July 4, 2026, Trump accounts will be able to accept contributions from parents, family members, employers, and other eligible contributors. 

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

QUESTION:

Our client has funds left over in her 529 plan. She is not working. Can she roll over the 529 dollars to a Roth IRA? Does she need earned income? Can you do it as a spousal Roth contribution?

Thanks,

Mary

ANSWER:

Mary,

Unused 529 funds can only be rolled over to a Roth IRA if the beneficiary has compensation in the year of the rollover at least up to the amount of the rollover. Also, a rollover must be in the name of the 529 beneficiary (so no rollovers to a spouse). There are a number of other rules to follow, including: the 529 must have been open for at least 15 years; there is a lifetime 529-to-Roth rollover cap of $35,000; and only up to the annual Roth IRA contribution amount can be rolled over in any year.

QUESTION:

What kind of investments will be allowed in the Trump accounts for kids?

Joey

ANSWER:

Joey,

An eligible investment for a Trump account is a low-cost mutual fund or exchange-traded fund (ETF) that tracks the S&P 500 index or any other “qualified index” comprised of stocks in primarily U.S. companies, and that does not use leverage. A mutual fund or ETF will be considered “low-cost” if its expense ratio is less than 0.1%. A “qualified index” does not include any industry or sector-specific index, but may include an index based on market capitalization. An index will be treated as comprised of “primarily” U.S. companies if those companies represent at least 90 percent of the index based on their weighting in the index.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

If a person has after-tax (non-deductible) money in any traditional IRA, SEP or SIMPLE IRA, then the pro-rata rule is just something that needs to be dealt with. But pro-rata is not the end-of-days hurdle that many people perceive it to be. In fact, with current tax software doing most of the heavy lifting, pro-rata might be considered a non-issue.

When after-tax (non-Roth) money exists in an IRA, the IRA owner cannot cherry-pick only those dollars for withdrawal or conversion to a Roth IRA. Barring a few exceptions, a proportionate amount of pre-tax (taxable) dollars and after-tax (non-taxable) dollars are required to be included in any withdrawal. That is the pro-rata rule in a nutshell.

How does an IRA owner document the after-tax dollars in his IRA and the amount of any withdrawal (or conversion) that is taxable? On IRS Form 8606. When a person makes a non-deductible contribution to a traditional IRA, Form 8606 is required to “claim the basis.” Form 8606 is essentially the IRA owner waving a flag to the IRS and saying, “I am putting after-tax dollars into my IRA.” Often, people intentionally make a non-deductible contribution to initiate a Backdoor Roth IRA transaction. But sometimes non-deductible contributions happen by mistake. Someone will contribute to a traditional IRA, realize later that it is not eligible for a deduction, and then just leave the contribution as-is.

Where people often get sideways with the pro-rata rule is thinking it applies to each IRA individually. Such is not the case. The pro-rata rule considers all of a person’s traditional IRAs, SEP and SIMPLE IRAs as one big bucket of money. If a person with pre-tax (non-Roth) dollars in one IRA makes a non-deductible contribution to another IRA (and the only dollars in that IRA are those after-tax dollars), a subsequent full Roth conversion of just that second IRA does NOT mean that only the after-tax dollars can be converted. As mentioned, the IRS considers all of a person’s IRAs for the pro-rata rule. No cherry picking.

Misunderstandings of the pro-rata rule like this, especially when it comes to the Backdoor Roth strategy, happen all the time. And when the IRA owner realizes that Form 8606 is now involved, along with a potential lifetime of pro-rata math, panic often ensues. How do I unwind this? How can I avoid pro-rata? How can I make this all go away?

To this, we say, “Just breathe. It is not the end of the world.”

Form 8606 is only needed in the year of a non-deductible contribution and in any year when a subsequent withdrawal or conversion is done. So, after a non-deductible IRA contribution is made, if the IRA owner makes no further such contributions, takes no distributions or does no Roth conversions for the next decade, then no Form 8606 is required for those years. Once the original basis is claimed on the form, it is locked in. And if the information on Form 8606 is properly entered into tax prep software, the software should carry that information forward for years to come. When a future distribution is taken or a Roth conversion is done, the tax software will simply compute the pro-rata math for you. Easy peasy.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

If you are faced with expenses that require you to tap into your savings, what are your options? You should always look to non-retirement savings first. Dipping into retirement funds could cause you to lose out on future tax-deferred (or tax-free) growth, and you may have to pay taxes and a penalty on the withdrawal.

But if you must touch your retirement funds, you may be surprised to know that the access rules differ between IRAs and company plans. You can always reach your traditional or Roth IRAs (with possible taxes and penalty) at any age. But tapping into your 401(k), 403(b) or 457(b) plan funds can be more difficult. That’s because Congress has set strict restrictions on withdrawals from those plans. And, to make matters worse, plans are free to impose even more restrictive rules than required by Congress. So, check your plan’s written summary or ask your plan administrator or HR rep for the particular access rules that apply to your plan.

If you leave your employer, you can usually take out all of your plan funds. By contrast, there are barriers to accessing your funds while you’re still working (through an “in-service withdrawal”). The rules are different for each of the various types of contributions within your plan:

• Pre-tax and Roth Elective Deferrals. Generally, 401(k) and other plans cannot by law allow in-service withdrawals of pre-tax and Roth deferrals (and associated earnings) before age 59½. But, if the plan allows, you can access these dollars before that age if you have a financial hardship or for certain other specific reasons. Most plans do allow in-service withdrawals once you reach age 59½.
• After-Tax Contributions. If your plan offers non-Roth after-tax contributions, the plan may allow you to reach those funds (and earnings) at any time, even before age 59½.
• Employer Contributions. Your plan may provide employer contributions, including matches. In that case, it may follow the same withdrawal restrictions for those contributions (and earnings) that apply to pre-tax and Roth elective deferrals. This simplifies plan administration. But some plans are more liberal and allow withdrawals at a specified age (even earlier than 59½), after you’ve been in the plan for at least five years or after the contribution has been in the plan for at least two years.
• Rollover Contributions. Some plans allow you to roll over funds from other plans you previously participated in, or from IRAs, into your current plan. Plans can allow you to access these rolled-in dollars (and earnings) at any time, regardless of your age or service. But this is not mandatory and here again, your plan might apply the same restrictive rules that apply to pre-tax and Roth elective deferrals.

Even if your plan doesn’t usually permit in-service withdrawals before age 59½, you still may be able to dip into your plan funds if you have a financial hardship or on account of another specified reason. Or, you may qualify for a plan loan. We’ll cover those options in a future Slott Report article.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

Question:

Are the rules for a grandchild who inherits an IRA the same as the rules for a child who inherits?

Thank you,

Steven

Answer:

Hi Steven,

No, the rules are very different. An IRA owner’s child who is under age 21 when the owner dies is considered an “eligible designated beneficiary” (EDB). As such, the child can stretch required minimum distributions (RMDs) until the year he turns age 30, but must empty the remaining inherited account by the end of his age-31 year. However, if the IRA owner died before the owner’s required beginning date (RBD) for starting RMDs, the child can elect instead to have the 10-year payment rule apply. In that case, the inherited IRA must be emptied by the 10th year following the year of the IRA owner’s death, but no annual RMDs are required in years 1-9. On the other hand, a grandchild is a “non-eligible designated beneficiary” (NEDB). So, the 10-year payment rule applies and, if the IRA owner died on or after his RBD, the grandchild also must take annual RMDs in years 1-9.

Question:

I have a client who was born on November 27, 1959. Does he need to start RMDs at age 73 or age 75?

Thank you,

Glenn

Answer:

Hi Glenn,

For anyone born after 1950 and before 1960, such as your client, the first RMD year is age 73. The age-75 first RMD year applies to those born in 1960 or later. Note that the RMD for the first RMD year can be delayed until April 1 of the following year, but then two RMDs must be taken in the following year – one for the first RMD year and one for the following year.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.