The IRA Whisperer — With Denise Appleby

Denise Appleby, chief executive officer of Appleby Retirement Consulting, has more than 20 years of experience in the retirement plans field, which includes providing training and technical consultation. Her company provides individual retirement account resources for financial, tax and legal professionals.

As complex as the topic of IRAs is, Appleby says keeping abreast of changes is key. Despite her level of knowledge, “the rules might change tomorrow,” she said. 

“My firm’s primary goal is to help prevent mistakes from being made with retirement account transactions, and where possible, provide solutions for mistakes that have already been made,” she said.

Appleby writes and publishes educational and marketing tools for advisors and has co-authored several books on IRAs. She has appeared on numerous media programs, sharing her insights on retirement account rules and regulations.

In this interview with publisher Paul Feldman, Appleby discusses Roth versus traditional IRAs, errors to avoid, required minimum distributions and SECURE 2.0. 

Paul Feldman: How did you get into financial services? And how did IRAs become your main focus? 

Denise Appleby: When I was new to America — I’m from Jamaica — I started by doing telework at a bank. The first job that had anything to do with IRAs was at Pershing. They hired me in the month of March when it was the height of IRA season — all hands on deck – and they borrowed me from the automated customer account transfer department, thank goodness. I took to IRAs like a fish to water, and they wouldn’t let me go back to the ACAT department.

I was new to the role, new to the tax code. I didn’t know what the tax code was, didn’t know what the IRS was, but I don’t like to do anything unless I know everything about it. I read the IRS publications, I read books, I read the tax code. When customers called, the general response they received usually was, “Go talk to your tax advisor.”

I didn’t find that acceptable. There’s a difference between education and advice, and you can educate the client without giving them advice. So when the advisors would call, they would say, “Get me Denise.” Everybody wanted to talk to me, because I knew the answers and I was able to translate them into English. The tax code is written in legalese. It’s a challenge to break it down for nonexperts.

Feldman: There are many different types of IRAs. Can you discuss each type and some of their key differentiators?

Appleby: The primary types are traditional IRAs and Roth IRAs, and there are others, like SEP [Simplified Employee Pension] IRAs and SIMPLE IRAs, but those are established by employers for their employees. Let’s talk about the one where you and I as individuals can go to any financial institution and say, “I want to set up an IRA.” And then the question becomes which one should you choose? It depends on multiple factors. There are some rules that will force you into a traditional IRA. For example, if you make too much money, you cannot contribute directly to a Roth IRA, but you can eventually get the funds in there by making the contribution to a traditional IRA and then converting that to a Roth. 

The question becomes, well, what’s the big difference? Money that you put in a traditional IRA grows tax-deferred, and when you take it out, it’s taxable. Money that goes into a Roth, it’s already taxed when you put it in. Earnings grow tax-deferred as well, but once you’re eligible for a qualified distribution, then everything’s tax-free. For many, a Roth IRA is the gold standard, because that means tax-free income in retirement. 

Another difference is once you reach the age at which you’re supposed to start taking RMDs — whether it’s age 72, 73 or 75 — you must start taking money out. That RMD rule does not apply to a Roth IRA. Some people think, I don’t want to take money out of my account, why are you forcing me to? If that’s a big issue, then you want to keep your IRA assets in a Roth IRA, but there’s still the big question of whether it makes sense from an income tax perspective. 

Some people may want to do the traditional IRA because it means getting the tax deduction now. The average annual salary right now for Americans is $57,000. For someone who’s earning $57,000 and wants to contribute to an IRA, they might be thinking, man, things are tight. I can hardly find the $6,500, but you know what? If I put it in a traditional IRA, I get a tax deduction, and that frees up more funds. You don’t get that break if you put it in a Roth IRA. 

If you Google “Should I choose Roth or traditional?” you will see people who claim to be experts saying, “Everybody should go into a Roth because it’s tax-free income and tax rates are going up.” I don’t have a crystal ball. I know all things point to income tax rates increasing, but there is no absolute certainty. Also, there is no absolute certainty about what tax bracket you will be in when you are ready to retire. So when someone asks me, “Which one should I choose, Roth or traditional?” I say, “That’s when you need to bring in your tax advisor, who will do a Roth versus traditional suitability assessment and make a recommendation based on certain projections.”

Now the good news is that if you’re on the fence about which one to choose, you can split your contributions between the two accounts. Contributions are only one of the ways that you can fund a Roth IRA, or even a traditional IRA. If you work and you have money in, say, a 401(k) or a pension plan and you are eligible to make withdrawals from those plans, then you can move those assets into your traditional IRA and a Roth IRA. 

Feldman: Can you give me an example where having the right information can make a big difference to a retirement investor?

Appleby: Sometimes a question might seem simple, but it’s not. The answer might be different based on the circumstances. I’ll tell you a real-life case where a taxpayer saved about a million dollars. This person wasn’t protected because he went to a financial institution. I like to call them big-box custodians, huge firms. 

He called the big-box financial institution and said, “I want to roll over my million dollars to my IRA.” He tells them it’s a traditional IRA, they give him a check made payable to another big-box custodian, TR IRA. Now, there are two types of IRAs, traditional and Roth. When you see TR, it means traditional, yet he walked into the second custodian, handed them a million dollars and said, “I trust you guys. I trust you to take care of me. Here’s my million dollars that I’ve worked all my life and saved.” 

They asked him, “What’s your account number?” He didn’t know it. So what happens in most cases is they pull up his account using his Social Security number. They read him an account number and said, “Write this on the back of the check.” He wrote it on the back of the check, they told him to endorse it and he did. Guess what? They put it in his account, and found out later that the account is a Roth IRA.

What’s wrong with this? That caused them to do a Roth conversion. Now, this person is in his early 60s. He doesn’t plan to take any money out until he reaches age 73 or 75, but now, they force him into taking a distribution that’s been included in income for a million dollars in one year, while the plan usually is to spread it out a little bit. Now, he owes about $500,000 in federal and state income taxes and the custodian refused to fix it. People might think, “Oh, it should be so easy,” but it’s not. For an advisor, the question becomes, how do you prevent something like that from happening? 

When someone comes in to see you and tells you they need to roll over their 401(k), get a copy of the statement. If it’s a traditional IRA and they want to retain tax-deferred status and not do a conversion, make sure that the receiving account is a traditional IRA, and have the assets directly rolled over to that IRA. The statement will also show you whether this client has Roth 401(k) assets, in which case, those assets would be rolled over to a Roth IRA. 

While you’re on that conversation, also look to see whether the account includes after-tax amounts. If a 401(k) includes after-tax amounts, then that amount should be rolled to a Roth IRA, not a traditional IRA. It can be rolled to a traditional IRA, but it’s much better to roll it into a Roth because the earnings will eventually become tax-free.

Feldman: What is the better IRA, Roth or traditional?

Appleby: One of the big debates right now is whether clients should choose Roth or traditional. A lot of people are saying, “Why should you convert now and pay taxes when you can put it off as long as possible and pay later when you’re in RMD status?” But one of the exceptions to that rule, when you should absolutely do it, is when you have after-tax amounts in your 401(k) or 403(b). Now, let’s assume that you have after-tax amounts in your 401(k) and 403(b). To make sure that the after-tax amounts are sent directly to your Roth IRA, you must say you want a split distribution. When you tell them that you want to split distribution, they’ll issue two checks, one to the traditional for the pretax amount, and one to the Roth for the after-tax amount. Make sure when you fill out the paperwork, it clearly indicates that.

If you don’t, then the entire amount will go into your traditional IRA. The downside is that because you now have after-tax amounts in your traditional IRA, the earnings on that will be taxable, and every subsequent distribution or conversion that you do will include a prorated amount of your pretax and after-tax balance. You must file Form 8606 to keep track of that. 

What happens if you don’t file Form 8606? You end up paying taxes twice on the amount. Tax rates are already too high. We don’t want our clients to have to pay taxes that the tax code says they shouldn’t be paying, right?

Feldman: What are some of the top questions you get asked by advisors about IRA rules and rollovers?

Appleby: It’s seasonal. Let’s say it’s getting close to required minimum distribution season. At that time of year, I get a lot of questions about required minimum distributions. It seems like a simple process, but there are 101 rules that apply. Say, for example, you have two traditional IRAs and a Roth IRA. RMDs do not apply to Roth IRA owners. They apply to Roth IRA beneficiaries. But if you have two traditional IRAs, you might think: “I want to take RMDs from only one of those IRAs and leave the other one nice and fat because I like that beneficiary better. Or the other one is for a charity — distributions will be nontaxable. Let me take the money from that.”

The question becomes, if you have multiple accounts, can you take the RMD from all those accounts or from one? And the answer is, “It depends.” For example, if you have multiple traditional SEP and SIMPLE IRAs, you can aggregate your RMD, meaning you calculate them separately and you take it from one or more. If you have multiple 403(b)s, same thing. But if you have multiple 401(k)s and pension plans, you cannot aggregate your RMD. If you have an IRA and you have a 401(k), you cannot aggregate RMDs for those accounts.

I also get questions on the RMD requirements or distribution requirements for beneficiaries, especially in light of the SECURE Act and SECURE 2.0. You know that with the SECURE Act, they drastically changed the rules that apply to beneficiaries. Now, unless you are classified as an eligible designated beneficiary, you cannot take distributions over your full life expectancy. If someone inherits an account from an IRA owner who was already taking RMDs, they must continue taking RMDs every year, and if they are not an eligible designated beneficiary, then they have only 10 years in which to take those distributions.

Another common question I get is, what are the rules that apply when moving retirement assets? One thing that will happen with a retirement account is that it will move. That could be because someone changed their job and they’re moving their old employer plan, or someone doesn’t like their old advisor and they want to move to a new advisor, or someone gets divorced and they’re splitting retirement assets, or someone dies and it’s being moved to the beneficiary. You must be very careful about the way you move those assets.

I’ll give you two examples that show why this is so important. If you move assets from an IRA to another IRA, you can do that as a transfer. A transfer is nonreportable, it’s nontaxable and you can do 10 transfers per day if you want to. 

The other way to move an IRA is as a rollover, where you take a distribution and you put it back in the IRA. You have 60 days to do that for it to be excluded from income. Now, you can do that only once during a 12-month period. I had a client who did 16 of these during a 12-month period.

Feldman: What’s one of the most important and impactful provisions advisors should know about SECURE 2.0?

Appleby: There’s a rumor that SECURE 2.0 doesn’t include anything great, and I disagree with that. There are a lot of great provisions in SECURE 2.0. For example, the RMD age is now increased. The SECURE Act increased it to 72. SECURE 2.0 increased it to 73 or 75, depending on when you were born. One of the benefits of that is your assets can stay in your traditional IRA or retirement account longer so your assets continue to grow tax-deferred. Another change, effective 2024, is that there are no more RMDs on a Roth 401(k), Roth 403(b) or governmental Roth 457(b). 

There are new Roth provisions, too. The only types of accounts that you could make Roth contributions to are Roth IRAs and Roth 401(k)s. Under SECURE 2.0, you can now make contributions to Roth SEPs and Roth SIMPLEs. But don’t ask me where to find one of those accounts, because I’ve been searching and nobody’s ready yet. 

Feldman: What are some effective strategies to avoid the RMD mistakes? What should advisors discuss with their clients?

Appleby: I’m very big on checklists. One of the common questions I get is, who calculates the RMD? For IRAs, for traditional SEPs and SIMPLE IRAs, the IRA custodian must send out an RMD notification by Jan. 31 of the year in which an RMD is due. The RMD notification must include either the calculated RMD amount or an offer to calculate the amount upon request. 

If you have a custodian that does the calculation, great, but you still must double-check it, and here is why. When an IRA custodian calculates an RMD, the formula says you must take the fair market value of the IRA for the previous year-end and divide it by the applicable life expectancy for the current year. 

Ask your client, “Did you take a distribution last year and roll it over this year?” Why is that important? Because then that rollover would not have been included in the fair market value for the previous year-end, and the IRA custodian will use that previous year-end fair market value, which is short the rollover that was done this year. 

The same thing applies if you started a transfer from the IRA last year that gets completed this year. If we ignore that, you’re going to have an RMD shortfall. When you have an RMD shortfall, you owe the IRS a 25% excise tax, which can be reduced to 10% in some cases if corrected in a timely fashion, or zero if the IRS approves or requests to get a waiver. That’s one of the things.

You also want to check for RMD aggregation. Can you really aggregate RMDs? I had a case where someone was taking the RMD for their 403(b) from their IRA for 13 years. It turns out you can’t do that, so now, we have a 403(b) that didn’t take RMDs for 13 years. 

Make sure aggregation is permitted, and remember that the RMD rules for inherited accounts are different. You cannot aggregate RMDs for inherited accounts with accounts that the individual owns. Even where you can aggregate RMDs for inherited accounts, aggregation is permitted only if the account is of the same type, say, a traditional SEP and SIMPLE, and it was inherited from the same decedent. Otherwise, RMD aggregation is not permitted.

Now, custodians are not required to calculate RMDs for inherited accounts. The IRS was very clear about this. Advisors should take those calculations done by a custodian with a grain of salt and double-check them, and here’s why. Usually, if you’re calculating RMDs for a beneficiary who is using the life expectancy option, the age of the beneficiary is used. But there are exceptions to that. 

If John inherited an IRA from Susie, and John is taking distributions over his life expectancy and dies and leaves the account to Jericho, Jericho can’t use Jericho’s life expectancy. Jericho must use the first beneficiary’s life expectancy. If a custodian doesn’t ask all those questions, there’s no way the calculation would be correct. If you have an RMD for the year and you’re rolling over assets, you must take the RMD before the rollover. 

Feldman: Listening to you talk about this, it’s clear this is very complex and should not be taken lightly by advisors.

Appleby: You must keep abreast of the changes. I was teaching a class once, and as I told the class about a particular rule, I said as I always do, “Listen, the rules might change tomorrow.” And what do you know? The rule changed the next day. 

Paul Feldman started the website InsuranceNewsNet in 1999, followed by InsuranceNewsNet Magazine in 2008. Paul was a third-generation insurance agent before venturing into the media business. Paul won the 2012 Integrated Marketing Award (IMA) for Lead Gen Initiative for his Truth about Agent Recruiting video and was the runner-up for IMA's Marketer of the Year, a competition that includes consumer and B2B publishing companies. Find out more about Paul at www.paulfeldman.com.