By Andy Ives, CFP®, AIF®
IRA Analyst
The Grinch likes it when things go horribly wrong. He likes it when rambunctious pets tip over Christmas trees. He likes it when festive lights get terribly tangled, and he likes it when holiday cards are lost in the mail. The Grinch likes burned Christmas dinners and obnoxious uncles and seeing people slip on ice. And when it comes to IRAs and other retirement accounts, the Grinch’s favorite things are penalties and missed opportunities. Here’s a coal-stuffed stocking full of transactions that are (for the most part) now too late to get done. (Insert evil Grinch smile here.)
Net Unrealized Appreciation (NUA). When a person has highly appreciated company stock in his 401(k), that stock can be distributed in-kind to a non-qualified brokerage account. The result is the account owner pays taxes at long-term capital gain rates on the appreciation when the stock is ultimately sold. But if the NUA transaction is not handled properly, ordinary income rates will apply to the gains. If a 401(k) owner unwittingly “activated” his NUA eligibility earlier this year (for example, by taking a distribution from the plan after a trigger event), it is too late to start the NUA process. There is little chance a 401(k) will be able to handle a new NUA distribution request this late in 2025. The NUA opportunity applicable to the most recent NUA trigger is forever lost. And to that, the Grinch whispers, “Delicious.”
Qualified Charitable Distributions (QCDs). QCDs are the most efficient way for those age 70½ and older to donate IRA money to charity. The funds must be sent directly from the IRA custodian to the charity. Or, if the check is made payable to the charity, it could be sent to the IRA owner for hand delivery. Do you think an IRA custodian will process a new QCD request this late in the year? Highly doubtful. Be aware: there is no such thing as a “prior-year QCD,” so don’t think you can backdate a distribution in early 2026 for 2025. Ah, but you have a “checkbook IRA” that allows you to write checks from your IRA account? The check must be CASHED by the charity before the clock strikes midnight on New Year’s Eve to qualify for 2025. It does not matter when the check was written. Better hustle, Little Who, if you want your QCD to count for 2023, plus 2!
Fixing an Excess IRA Contribution. Did you contribute too much to an IRA in 2024? Did you contribute to a Roth IRA in 2024 and then realize after the fact that you were not eligible for a Roth IRA? The Grinch points his gnarled finger at you and smirks. The deadline to fix a 2024 excess (or ineligible) IRA contribution with no penalty was October 15, 2025. You missed it by months. For your holiday gift, the Grinch stuck a big red bow on a box that contains a 6% penalty, just for you. (He also put Form 5329 in a holiday envelope so you can pay the IRS.)
Taking a Required Minimum Distribution (RMD). The deadline to take an RMD from an IRA is December 31. We are not talking about a person’s first RMD at age 73, which can be delayed until April 1 of the following year. We are talking about post-age 73 lifetime RMDs and RMDs applicable to inherited IRAs. Take the RMD by the end of the year, or you will get your own specially wrapped gift from the Grinch containing a potential 25% missed RMD penalty. (The Grinch shopped all over for your special prize…in just the right color and shape and right size.)
Roth Conversions. For a Roth conversion to count for 2025, the funds must be out of the taxable account by December 31. Oh, such a tantalizing close date…and it’s probably already too late! To all the people who missed their target, the Grinch knows he won’t lose. He scoffs and he sneers, “Boo-hoo to the too-late Whos.”
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.
https://irahelp.com/grinch-gifts-penalties-and-missed-opportunities/