Ed Slott IRA and Tax Updates for 2025

Speakers: Jon Gay, Bruce Hosler, & Jason Hosler

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Jon Gay (00:07):

Welcome back to Protecting & Preserving Wealth, I’m Jon Jag Gay, joined as always by Bruce Hosler and Jason Hosler of Hosler Wealth Management. Good to be with both of you guys today.

Bruce Hosler (00:14):

Great to be with you, Jon. Thanks for joining us.

Jason Hosler (00:18):

Good morning, Jon. Good to be here.

Jon Gay (00:21):

Alright, I love talking to the two of you because you always kind of have your fingers on the pulse of what’s going on in this world. And Bruce, I know you just got back from your spring Ed Slott Master Elite IRA Advisors Conference. You’ve got some updates for us, some retirement and IRS stuff that you want to share with our listeners. Where do we start?

Bruce Hosler (00:39):

Well, first of all, I want to just give a little history. I just came back from Ed Slott, they celebrated the 20 years that he’s had this Ed Slott Elite Advisor Group, and I realized that I’m coming up on about 19 of those years. I was just a year or so into it. So, I’ve had quite a few years of going to this.

I go twice a year; we spend three days going on all the updates on the tax law changes. There are three updates that I want to pass along to our listeners to help them navigate the new tax rules, some that I think that people aren’t aware of. So, Jason, let’s start with the new form, 1099-R for QCDs. Folks, QCDs are qualified charitable distributions. What are we talking about on a QCD, Jason? What is that?

Jason Hosler (01:29):

Yeah, I’m excited about this one because this is one of those overlooked areas that the IRS seems to have neglected for a while in their reporting regime. Another great example of this was last decade they passed a law where the various companies had to finally start reporting the basis on stocks and bonds and mutual funds. And you realize that they weren’t reporting that to the IRS and everyone was just making it up on their own.

Oh, my goodness, they have these gaps sometimes that are just kind of crazy, the QCD is one of those. A qualified charitable distribution is a distribution that you make from your traditional IRA directly to a charity. So, when you are charitably inclined, you can make that distribution and it does not count as taxable income on your own tax return.

But what it does do is it will fulfill a required minimum distribution if you need to make one of those. So, it’s a very strong planning tool in a number of scenarios for being able to meet your required minimum distribution and not have to include it in your taxable income.

Bruce Hosler (02:42):

There is a requirement folks, you must be 70 and a half years old in order to perform a QCD and when they say 70 and a half, that means you can’t actually affect it until you’re 70 and a half. So, if you turn 70 in January of 2025, you have to wait until the second half of the year until you’re 70 and a half to do your QCD.

Now you don’t have an RMD when you’re 70 and a half, but if you’re charitably inclined, you may want to go ahead and give some of that money away so you don’t have to have taxable IRA income later; you can give that money out of your IRA, very attractive.

Up until now you had to be sure that your tax accountant knew when you did a QCD because there was no paperwork from your IRA custodian to tell your tax professional, “Hey, by the way, that $50,000 that I gave to the college is not … that IRA distribution, that 1099, that was a QCD.” If they don’t know, they just put it in there and you paid the $50,000 and the charity got it. They didn’t recognize taxes, but you did, you shouldn’t have had to do that.

Jon Gay (03:59):

Just to be clear Bruce, you say $50,000 to the college, you’re talking about a QCD, not what tuition is ballooned to these days (laughs).

Bruce Hosler (04:04):

Right, no, I’m just talking about the gift. I’m just talking about the charitable gift from your IRA that you don’t have to count. Well, we have a couple of codes on the new 1099-R, and it’ll be a Code 7 for a normal IRA distribution, it’ll be a Code 4 on an inherited IRA.

“Hey look, your mom and dad died, they left you an IRA, if you’re 70 and a half you can do a QCD and that code will be 4 on the 1099-R that comes out,” so you can do those. And finally, it’ll be a code K if you take it out of other asset IRAs like an IRA that is real estate or gold, something that’s not as security and readily valued.

Now, how does this change take effect? Well, on this next year when you start doing your QCDs, it’s going to come on your 1099-R, so this is really a great thing. So, what do we want to remind our listeners about this, Jason?

Jason Hosler (05:03):

You want to be making QCDs generally early in the year to make sure that you are covering your required minimum distribution. The first dollars out of your IRA, if you do have a required minimum distribution, have to go towards that. So, if you do your QCD early to make sure that you’re meeting that requirement, that just keeps everything cleaner and attached here.

Jon Gay (05:24):

Assuming you are 70 and a half, of course.

Bruce Hosler (05:26):

Assuming you’re 70 and a half. Now, even if you have this new 1099-R folks, you need to still tell your tax professional that you’re doing a QCD and the amount and the date so it can get correctly reported on your return.

The software allowed us to put on the left-hand side, “QCD,” and that way the IRS knew that that wasn’t taxable, even though the distribution’s in the middle of the 1040 on those forms, so just be aware of that.

The second thing I want to talk about now is Form 8606. Now this form is designed for anybody who is making an IRA contribution and they’re taking a distribution in the same year. How much of that distribution is taxable? That is determined on the 8606. So, it’s kind of a calculation form and it’s used to track what’s called cost basis in an IRA.

Now you may say, “Bruce, what do you mean cost basis? IRAs don’t have a cost basis because they’re qualified money and all the money in an IRA is taxable.” Well, that’s not exactly true if you have non-taxable money inside of your IRA. Now Jason, how do we get non-taxable money inside of our IRA? What do we have to do to get what’s called basis in an IRA?

Jason Hosler (06:52):

The main way is going to be making a non-deductible IRA contribution. You’ll see a lot of people talk about this online with the Backdoor Roth concept. So, if you have no other IRAs and you make a non-deductible contribution, you’re not limited on making a non-deductible contribution, people will then turn right around, and they’ll convert that to a Roth IRA.

So, if you don’t convert it though, if you make a non-deductible contribution and you already have IRAs, they have to calculate how much of that is basis versus how much is tax deferred. And so the 8606 tracks all of that.

Bruce Hosler (07:35):

So, folks here is a very important recommendation for you, if you have any basis in your IRA, you want to make sure that your tax preparer checks the box in the software and files an 8606 every year. Even though you’re not making a contribution or a Roth conversion this year or you’re taking a distribution this year, I still want you to file 8606.

Why do I want you to do that? Well, this is what I want you to think about. How long does the IRS keep tax returns, Jason? How many years do we have to amend a tax return?

Jason Hosler (08:13):

So, you have three years to go back to amend a return and the IRS can look back seven.

Bruce Hosler (08:20):

If there’s fraud or they think there’s other untoward actions on a return. So, if that’s the case three years from now, if you filed the 8606 this year, the IRS has got rid of all those tax returns. They’re not looking at it, it’s not a current number in front of them. So, I want our clients to always have that cost basis on the return in the last three years.

So, if we take a distribution out and we’re saying, “Hey, we’re taking a hundred thousand out and 50% of our IRA has basis in it, so only $50,000 of the a hundred thousand is taxable and we put that on the return,” do you think there might be a few flags and a few bells going, ding ding, ding ding at the IRS going, “This is taxable, we’ve got a hot one on man!” they’re going to reel you in. You have to have that 8606 and the IRS records so they don’t try and take your free money that you’ve paid basis on already.

Jon Gay (09:16):

For the record, and for those of you listening to the audio version of the podcast, the sound that Bruce made when he reeled it in was topped only by the motion of him catching a fish as he was doing it (laughs).

Bruce Hosler (09:29):

That fish is running baby. Okay, let’s talk about our last topic here, which is violating the one rollover per year rule, one rollover per year. Now, let’s define what the one per year is, Jason, what is one rollover per year, what are the terms of that?

Jason Hosler (09:48):

Well, a lot of people are going to think automatically that it’s a tax year, but it doesn’t work that way. It’s the last 12 calendar months. So, if you made a rollover here in May of 2025, that starts the clock for 12 months from now to May of 2026 before you can do another rollover without dinging yourself on this rule.

Bruce Hosler (10:09):

Now I want to clarify two things that Jason said there, folks, because I want to translate it to pure human American English. He said the tax year and I want you all to know that as an American individual filing your tax year is a calendar year, January 1st, December 31st, that is your tax year.

So, that’s the calendar year and that is your tax year. And when he says only once per year around there, it is technically 365 days, they count the days. So, today we’re on May 22nd, it is through May 23rd next year before you can do another rollover, they actually count the days.

Jon Gay (10:54):

And don’t forget leap year too (laughs).

Bruce Hosler (10:55):

Leap year too, and it begins on the day that you receive the distribution. So, if you request a distribution from Fidelity and they mail it out, it’s the day that you receive it in the mail that starts the clock. Well, what if we don’t mail it folks? What if we just do a transfer from your IRA and it goes into your checking account? Boom.

Jason Hosler (11:16):

Right there. The clock is starting. Yep.

Bruce Hosler (11:20):

So, it’s the day that the taxpayer receives the money. Now what if you take another distribution, Jason, in that one year, what happens?

Jason Hosler (11:33):

Well, you could blow up that rollover and potentially the entire account could become taxable.

Jon Gay (11:37):

Oof.

Bruce Hosler (11:39):

The entire account does become taxable because you took a distribution. This is a very expensive mistake folks, very expensive. So, let’s also talk for a second, if you take another distribution, it can be a different IRA account and I don’t want anybody to make this mistake.

When I was at Ed Slott, one of the examples that they gave us was there was a new brand-new young advisor and he was speaking to a lady. And she had an old advisor, and she didn’t like him very much. And the old advisor said, “Look, if you’re serious, you need to move over $10,000 of your $3 million IRA to me.”

So, she moved over $10,000 to him. She went to the bank, got a check, gave it to that old advisor. He was not very polite to her; she didn’t like him. The new advisor was very friendly and he was on top of it. He says, “Let me help you. Go to the bank, get the rest of your $3 million, bring it over and I’ll put it into an account.” That new young advisor just caused her to break the rule and the whole $3 million is taxable that year.

Jon Gay (12:48):

Wow.

Bruce Hosler (12:51):

Now folks, here’s the other thing you do. I know, I know you trust us and love us, but you might have your own little IRA account that I’m going to call it your gambling account. It’s your account where you want to trade your stocks yourself, Schwab, Fidelity, E-Trade wherever it’s at. If you take a distribution out of there and you don’t tell us and we have to take another distribution, you just broke the rule.

Jon Gay (13:16):

Wow, that’s huge.

Bruce Hosler (13:17):

So, different IRAs at different custodians can blow this up. I’m just trying to put you all on notice. You don’t want to take distributions where you take possession of the money. That means the check is deposited in your checking account. What do we want instead, Jason?

Jason Hosler (13:34):

We want to do a trustee-to-trustee transfer. And when we start working with a new client, almost a hundred percent of the time, that’s the way that it goes now. All of these institutions are able to talk to each other on the backend.

So, you would open a new IRA, you’d have the old trustee send the funds directly to the new account. They never come into your possession, you never touch them and when it’s a direct transfer like that, then you’re avoiding some of the pitfalls associated with this rule.

Bruce Hosler (14:09):

Absolutely. The other one that we sometimes run into is what I’m going to call a direct transfer and that happens frequently if you have an IRA, a 401(k), excuse me. If you have a 401(k) account and you want to roll over your retirement count to an IRA, the 401(k) plan will demand, can you believe this? They’ll send a half a million dollars, a million-dollar 401(k).

They’ll mail it through regular mail to your house. But they’ll make the check payable to the new custodian. That’s what you want to have happen. That avoids a rollover, that’s just a direct transfer.

Jon Gay (14:45):

Alright, so Bruce, my key takeaway here is it needs to be custodian to custodian. The check or the distribution cannot be made out to you as an individual person.

Bruce Hosler (14:53):

The check is made out or the transfer goes to the other, to the new IRA custodian.

Jon Gay (14:57):

Not to you as-

Bruce Hosler (14:58):

Not to you. You don’t take possession; you don’t have the check made payable to you.

Jon Gay (15:02):

Got it.

Bruce Hosler (15:04):

And where that comes in, if people have IRAs at banks, they tend to write checks back to the people; that’s where you get in trouble. Your regular financial advisors are a little bit more aware of this. But that doesn’t mean that somebody can’t call up their advisor and say, “Hey, I want my IRA, send it to me and I’m going to go put it in my bank.” That’s a rollover because you got the check, and now you’re going to deposit it and was made payable to you.

Jon Gay (15:28):

Let’s go through which types of transfers this rule applies to and which it does not apply to.

Bruce Hosler (15:34):

The transfers that are subject to this rule is if you go IRA to IRA or Roth IRA to Roth IRA and you see me holding up my hands for zero because Roth is non-taxable but you still blew up the Roth and you lost all the tax advantages of it if you distribute that and it’s treated as a distribution.

If you do that in a year, you may not pay the tax but you just lost all the rest of that tax free growth. You paid all the taxes to get into the Roth and now you just blew up your Roth.

Jason Hosler (16:04):

Catastrophic. You can’t do that.

Bruce Hosler (16:06):

Yeah, it is catastrophic. Now the following transfers are not subject to this rule. So, if you go from a 401(k) to an IRA that’s not subject to this because they’ll do a direct transfer almost always. An IRA back to a plan, if you’re working, you have an IRA, you want to put it in your 401(k) plan that’s not subject to the once per year and then if you do an IRA to Roth conversion, that is not subject to once per year.

So, we will do multiple Roth conversions within a year. Now we always do them trustee to trustee, but that’s not subject to the once per year rule. Now the rules are easy to blow up and make a catastrophic mistake. That’s what I’m trying to get in front of you with on this.

So, if you always use a trustee-to-trustee transfer, that’s pretty much the best way to protect yourself when you do that. Those are the kind of the main three that I wanted to cover from Ed Slott here and I think this will help protect you on some of these new tax law updates in 2025.

Jon Gay (17:07):

So, Bruce, I was going to ask you that, these apply to the 2025 tax year that you’ll file?

Bruce Hosler (17:11):

Well, they’ve already been in place, the once per year rule and so is the 8606, but the new one this year is that 1099-R for QCDs. That’s brand new that just came out. But I wanted to refresh these other two because I think the rules that apply to people that we see people make catastrophic mistakes not filing the 8606. You get 5 or 10 years in and you have a lot of basis in an IRA and the IRS says, “No, you don’t have any basis in there and you don’t have that current in your records if you’re not tracking that.”

And you know a lot of people are like, they want to clean things out. Hey, seven years, they got rid of it. Well, they got rid of everything that was seven years older and they didn’t file in any 8606 for the last seven years but they have basis in their IRA that they’ve had for 30 years, you just lost all that tax free money in your IRA.

Jon Gay (18:00):

So, as I said at the beginning of the podcast, I like talking to the two of you every couple weeks, because we really go through the current stuff and what people need to know today but I think the other point you made today is avoiding those catastrophic mistakes.

I mean you start seeing dollar signs like that, that is that is really scary stuff. So, if somebody wants to come talk to you and the team at Hosler Wealth Management and you’ve got two offices, what are the best ways to find you?

Bruce Hosler (18:23):

Obviously online you can get us at hoslerwm.com if they want to call Prescott, Jason?

Jason Hosler (18:30):

Give us a call at (928) 778-7666.

Bruce Hosler (18:34):

And in Scottsdale folks, (480) 994-7342.

Jon Gay (18:38):

Really important information, as always, appreciate you both. We’ll talk to you again in a couple weeks.

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Jason Hosler (18:42):

Thanks Jon.

Bruce Hosler (18:43):

Thanks Jon. Take care guys.

Disclosure (18:45):

Investment advisory services are offered through Mutual Advisors, LLC DBA Hosler Wealth Management, a SEC registered investment adviser. Securities are offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively “Mutual Group”) are affiliated companies. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties,  2) promoting marketing or recommending to another party any transaction or matter addressed herein, and 3) Tax preparation and accounting services are offered independently through Hosler Wealth Management Tax Services. Any tax advice provided by tax professionals under Hosler Wealth Management Tax Services is separate and unrelated to any advisory or security services offered through Mutual Group. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Mutual Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Accordingly, Hosler Wealth Management does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.