Supreme Court Rules Defense of Marriage Act is Unconstitutional: IRAs are Affected

On June 26, 2013, the Supreme Court ruled that the Defense of Marriage Act (DOMA) was unconstitutional. The ruling opens the door for same-sex couples who are married under state law to enjoy the same tax benefits that opposite-sex married couples have.

Under DOMA, only opposite-sex couples were considered married under federal law; however its legality was challenged by Edie Windsor. Ms. Windsor and her partner, Thea Spyer, were considered married in New York. Spyer left her entire estate to Windsor, but because of DOMA, the estate did not qualify for estate tax breaks for married couples, resulting in the payment of federal estate taxes of over $363,000. Windsor sued for a refund of those taxes claiming DOMA violated the equal protection clause of the Fifth Amendment of the Constitution.

The Federal District Court and an Appeals Court agreed with her and ruled she was entitled to a refund of the estate taxes, plus interest. The US Supreme court agreed to hear the case.

The Supreme Court ruled that DOMA is unconstitutional by treating legally married same-sex couples differently from married opposite-sex couples. This ruling has an impact on how same-sex couples will be taxed. It also affects IRAs.

The same federal tax benefits that have been available to opposite-sex couples will now be available to same sex couples. These benefits include, among other things, the ability to file a joint federal income tax return, and the ability to claim each other’s tax deductions, for example medical expenses.

With respect to IRAs, many spousal benefits will now also be available. For example, when an IRA owner dies, a spouse beneficiary can do a spousal rollover (or transfer) of the deceased spouse’s IRA to his or her own IRA, and not have to take death distributions until they reach age 70 ½. Now, that option will be available to same-sex married couples. As long as the couple is considered married under state law, the spousal IRA benefits are available.

Other spousal IRA benefits include the ability to make spousal IRA contributions for the nonworking spouse and the ability to split retirement plan assets tax free in a divorce.

The states that currently recognize same-sex marriage are: Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective 8/1/13), New Hampshire, New York, Rhode Island (effective 8/1/13), Vermont, Washington, and the District of Columbia.

-By Joe Cicchinelli and Jared Trexler

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Spousal Waivers and IRAs

You are married and have an IRA. You know you need to name a beneficiary for those funds. But what if you do not want to name your spouse as the beneficiary? Are you required to name him or her? Under federal law, and IRAs are governed mostly by federal law, you are not required to name your spouse as your IRA beneficiary. You can name anyone you want as the beneficiary. They don’t even have to be a relative.

State law will have some impact here, though. If you live in a community property state, you will most likely need to have your spouse sign a waiver before you can name a non-spouse beneficiary for your IRA funds. In some states, you can “disinherit” your spouse by naming someone else on the beneficiary form, but the spouse could have the last laugh. Some states allow a disinherited spouse to make a right of election against the estate and the spouse would then end up with some of your assets. He or she could then laugh all the way to the bank.

In most employer plans, if you are married and want to name someone other than your spouse as the beneficiary of your plan benefits, you must have your spouse sign a waiver.

Be careful who signs the waiver. It must be a spouse. Documents signed by a fiancé, such as a pre-nuptial agreement, do not count. Once a spouse signs a waiver, update the beneficiary form. You should do both steps to ensure that your assets go to the beneficiaries that you select.

Divorce decrees also don’t count. A spouse can waive rights to retirement benefits in a divorce decree, but as long as a beneficiary form naming the spouse remains in place, that spouse - now the ex-spouse - will, in most cases, end up with the retirement benefits. Always update beneficiary forms after a divorce.

Beneficiary form reviews should be a key component of your financial plan, whether you are your own planner or you have a professional doing this for you. You can see how something that seems so simple can quickly become complicated.

-By Beverly DeVeny and Jared Trexler

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IRA Distribution Tables: Fact or Fiction

The IRA distribution tables can be confounding to the average retiree. What table should I be using? How do I calculate my RMD (required minimum distribution)? We look at several different scenarios and provide the facts and common misconceptions involving the IRA distribution tables.

There is one table that everyone uses to determine RMDs.
A: Fiction. There are actually three different life expectancy tables that are used to determine RMDs, depending on your situation; the uniform lifetime table, the joint lifetime table and the single life table.

All IRA owners must use the uniform lifetime table to determine RMDs.
A: Fiction. Most IRA owners will use the uniform lifetime table to determine the RMDs for their own IRAs, but if your spouse is your sole beneficiary for the entire year and he or she is more than 10 years younger than you, you can use the joint lifetime table to determine RMDs.

All IRA beneficiaries must use the single life table to determine RMDs.
A: Fact. This one trips up a lot of people. I’ve even seen major custodians who have calculated RMDs for clients incorrectly because they didn’t use the single life table to determine RMDs for a spousal beneficiary. To be clear, ALL beneficiaries use the single life table to determine RMDs on inherited IRA accounts. There are some special rules for certain spousal beneficiaries, such as the ability to “recalculate” each year, but even the special rules call for the use of the single life table.

IRS adjusts the life expectancy tables each year to keep pace with longer life expectancies.
A: Fiction. IRS can adjust the life expectancy tables from time to time, but they certainly don’t do so on a regular basis. In fact, it’s been roughly a decade since they were last updated.

All IRA owners and beneficiaries determine RMDs using the same life expectancy factors, regardless of their “real” life expectancy.
A: Fact. Your actual life expectancy has no bearing on how you calculate RMDs. For instance, a 40- year-old beneficiary has a life expectancy of 43.6 years on the single life table. That means that a 40- year-old-marathon runner in perfect health and great longevity genes uses 43.6 as their RMD factor. It also means that a 40-year-old diagnosed with a terminal illness uses the same factor. Age is all that matters to determine your life expectancy in the eyes of IRS.

Using the wrong life expectancy table can create major tax problems.
A: Fact. Fact. Fact. Get the point. Using the wrong life expectancy table can create big problems for you. If you’re lucky, you calculate wrong and take out too much. You won’t face any penalties for that, but you’re giving up valuable tax deferral and paying tax before you have to. On the other hand, if you calculate an RMD too small, it could lead to a 50% penalty on any shortfall, as well as excess contribution penalties if the shortfall is rolled over. Other penalties could be enforced as well, so make sure you use the right life expectancy table and carefully calculate your RMD.

- By Jeffrey Levine and Jared Trexler

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