This week's Slott Report Mailbag demonstrates IRA intricacies, but also the difficulty in rectifying mistakes that have been piling up without an IRA owner's knowledge for years. These questions, and our answers, also stress the importance of putting together and working with a knowledgeable retirement team - an attorney, accountant and financial advisor. Here's a link to competent,
educated financial advisors in your area.
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I had a 401(k) retirement plan with my previous employer (University).
When I transferred to my current University employer (27 years ago), where I am still working, I continued contributions to the same retirement company for the same 401(k) plan through my new employer. For the next 20 years I was receiving one unified statement from the (retirement) company. A few years ago (6 or 7), the company split the plan into two, without informing me of any tax implications, and started sending statements itemizing separate accumulations from the two employers.
Upon my inquiry, I was told I should have been taking RMDs (required minimum distributions) from the part of the plan from my previous employer.
I have the following questions:
Should I formally roll over the part of the plan from my previous employer into one of my current employer? What RMDs am I liable for? Am I subject to penalty taxes?
Sincerely,
M. Daniel Professor
Answer:
The still-working exception for RMDs only applies to the employer for whom you are working. It does not apply to plans held with previous employers. Before you can move the old 401(k) plan to either your current plan or to an IRA, you will have to take all RMDs you have missed. You will have to file Form 5329 with IRS for each year that you have a missed distribution. There is a penalty of 50% of the amount not taken for each year. You can request a waiver of the penalty, after you have taken all the missed distributions, by attaching a note to the Form 5329. If you do not file the Form 5329, the statute of limitations does not start to run. We highly recommend that you take all the necessary steps to correct this issue as soon as possible.
2.
How can I setup a minor as a beneficiary of an IRA and protect the funds from the parents?
Thank You!
Answer:
In all likelihood, you will need to explore the possibility of naming a trust as the beneficiary of your IRA. The beneficiary of the trust will be the minor. However, there are many complications associated with a trust as the beneficiary of an IRA. You should speak to an attorney knowledgeable in the retirement plan rules to determine whether it makes sense under your particular facts and circumstances to do so.
3.
Hello, Ed:
It seems as though this should be easy, but it isn’t. My mother intentionally set up her IRA so that I [age 55] would be named as the beneficiary upon death with the understanding that I would give my brother [age 45] his “fair share.” This was done to protect him from himself - he’s not a good manager of finances. Unfortunately, no contingent beneficiary was named and the plan administrator defaults it to the estate. My mother has now died at age 73.
So - the first question is whether I can simply disclaim and name him as a contingent beneficiary to the extent of his “fair share”? Seems simple. How to do this? I am trying to avoid being taxed on 100% of the IRA. Then, how to set it up so that we both get our “fair share”? Finally, then what happens to the money? Can any of it be used or is it limited to RMDs? Personally, I’d like to take my share and put ti back into a retirement account; my brother, on the other hand, has dire financial needs and could use the money.
Your help and thoughts would be greatly appreciated.
Thank you,
David
Answer:
When you disclaim some or all of the IRA, you cannot direct who gets the money. After a disclaimer, it’s as if you died before your mother, so in your case, the disclaimed IRA money would go to her estate. A disclaimer is not simple, and we recommend working with an attorney who is familiar with the special rules for disclaiming an IRA. One of the pitfalls is that something you disclaim cannot come back to you as a beneficiary, which could happen when the estate is the beneficiary of what you disclaim (this is why we recommend you consult with an attorney).
The portion that goes to the estate will be paid out over your deceased mother’s single life expectancy to the estate until it is closed. The beneficiary is not limited to taking out just the RMDs; they can always take out more.
Another option might be, depending on how much money is involved, to simply to take a taxable IRA distribution, figure out how much tax you owe, and then gift an amount to your brother. However, to avoid gift tax issues, the gifted amount to your brother can’t be more than $14,000 for 2014. Before doing this, you should speak to your accountant.
- By Joe Cicchinelli and Beverly DeVeny
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