Differentiating between retirement plans and their tax reporting componentsBy: National Association of Tax Professionals
December 5, 2022

Many employers offer some sort of retirement plan to which its employees can contribute to help secure and fund their future. There are plans outside of employer-offered plans, too. Some taxpayers may benefit from one specific type, while others may find value in investing in a variety. Making this determination involves looking at the tax and distribution implications.

Below, you’ll find a few of the top questions from a recent webinar on this topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.  

Q: Can taxpayers who are self-employed and contributing to a simplified employee pension plan (SEP) also contribute to a traditional IRA?
A: Yes. However, they are an active participant in a retirement plan (SEP IRA). Thus, if their income is too high, the traditional IRA contribution might be nondeductible or only partially deductible.

Q: What is a backdoor Roth? Is there a holding period requirement before implementing the conversion?
A: The taxpayer makes a nondeductible contribution to a traditional IRA first and then converts it to a Roth IRA. Taxpayers do this when their income is too high to make a regular Roth IRA contribution. There is no holding period requirement before the conversion may be made. For example, taxpayers can make a traditional IRA contribution one day and convert it to a Roth IRA the next day.

Q: If you have pre-tax money sitting in a traditional IRA, won’t a backdoor Roth conversion be partially taxable?
A: Yes, you must aggregate all IRAs when determining how much of the conversion is taxable.

Q: Can I take all my required minimum distributions (RMDs) from one traditional IRA without taking some from each traditional IRA?
A: Yes, the required minimum distribution must be calculated separately for each IRA. The separately calculated amounts may then be totaled, and the total distribution taken from any one or more of the individual’s IRAs. Generally, only amounts in IRAs that an individual holds as the IRA owner may be aggregated [Reg. §1.408-8, Q&A 9].

Q: How do taxpayers know whether they are taking their RMD?
A: In general, all amounts distributed from an IRA are taken into account in determining whether their RMD is satisfied, regardless of whether the amount is includible in income [Reg. §1.408-8, Q&A 11].

To learn more about retirement plans, benefits of different types of plans and distribution requirements, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to join our completely free 30-day trial, visit natptax.com/explore. 

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penAbout National Association of Tax Professionals

The National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.

The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.

Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.

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