Why You MUST Check Your IRA (or Plan) Agreements

Most of the time we are telling you how important it is to check IRA beneficiary forms to be sure they reflect your current planning objectives - such as the stretch IRA. It is also important to check the IRA agreement or an employer’s summary plan description (SPD) for the plan.

Why?

Because when we write about the IRA distribution rules, we write about what the tax code allows. An IRA custodian or employer plan can sometimes narrow those choices. They can never allow more than the tax code allows, but in many instances they can offer less.

Most employer plans do not offer a stretch option to a non-spouse beneficiary because they do not have to. However, they do have to allow a named non-spouse beneficiary the ability to do a direct rollover from the inherited plan account to a properly titled inherited IRA (or Roth IRA).

On the IRA side, a custodian does not have to offer a direct transfer option. The custodian could say you either leave it here in an inherited account or we will send a check payable to the beneficiary. The check option is a taxable distribution to a non-spouse beneficiary and the funds cannot be put back into an inherited IRA. A spouse beneficiary could do a 60-day rollover into an account in his or her own name, but only if they have not done another 60-day rollover in any other IRA in the previous 365 day period.

Other items to check for are the ability to use a trust as a beneficiary, the ability to use a power of attorney and the ability to disclaim inherited retirement assets. These are all actions allowed in retirement accounts, but IRA custodians and employer plans do not have to allow any of these options. If they are an important part of your estate plan, you better check to see if they will work with the company holding your retirement funds.

Now is the time to find out if you’re planning will all work the way you want it to. If an IRA custodian will not accommodate your planning, you can move the account to one who will. If your funds are in an employer plan that will not allow certain aspects of your planning and you are still working there, you will be stuck with the rules of the plan. But at least you know in advance and you can try to plan around the employer plan limits. After your death, it is too late.

- By Beverly DeVeny and Jared Trexler

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3 Things To Check On A Beneficiary Form ... Besides The Beneficiaries

The Beneficiary isn't the only thing you must check on your own or a client's beneficiary form. Here's a list of 3 other important things to make sure are present on the beneficiary form. Do you think there are others? Email us at [email protected]. 

1. Does the beneficiary form work on a per stripes or per capita basis? - Ideally, when you name beneficiaries on a beneficiary form, you don't just stop with the primary beneficiaries, but you add contingent beneficiaries as well. But when are those contingent beneficiaries entitled to any funds and when they are, how much are they entitled to? The answer to those questions may depend, in part, on whether your beneficiary form follows per stripes rules or per capita rules. Those rules are beyond the scope of this article and, in some cases vary slightly from state to state, but your financial or estate planning professional should be able to explain them to you.
2. Are there any restrictions on who you can name as a beneficiary? - You might think that just because your IRA money is yours, you can name whoever you want as your beneficiary whenever you want to. From a tax code perspective, that's true, but believe it or not, those seemingly inalienable rights can be restricted. Some beneficiary forms, for instance, may not allow a trust to be named as a beneficiary. Others may limit the number of primary or contingent beneficiaries you can name. In other cases, you options may be limited in other ways. Most custodians won't place these types of restrictions on your account, but are you sure yours doesn't?
3. Does the beneficiary form allow the stretch? - Under the tax code, a designated beneficiary (generally just a living, breathing person) can stretch distributions from an inherited IRA over their life expectancy. Doing so helps to maximize the potential value of an account by minimizing the impact of income taxes while maintaining tax deferral for as long as possible. The stretch can be limited however. For instance, a retirement account may require that any beneficiary - designated or not - empty an inherited account within 5 years. This is more common to see in plans than it is in IRAs - most IRA providers now allow the stretch - but in either case it's nothing to take for granted. Do your homework and double check now, before it’s too late. 

- By Jeffrey Levine and Jared Trexler

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Why You Should NOT Name Your Estate as IRA Beneficiary

You're allowed to name anyone as the beneficiary of your IRA. You’re also allowed to name a non-person as your IRA beneficiary. Examples of non-persons would include charities, a trust, or your estate. It is generally not a good move to name your estate as your IRA beneficiary.

When you die, your estate includes the property that you owned at the time you died. It’s a legal entity that’s created after you die. Your executor must then pay your expenses and liabilities and distribute the balance according to your will. If you don’t have a will, state law determines who gets your assets. However, your IRA is different from other assets you own, such as your house. An IRA goes to the beneficiary you named on the IRA custodian’s beneficiary form. Your IRA passes to your named beneficiary; your will does not control who gets your IRA.

If you name your estate as the beneficiary of your IRA, then your will controls who gets it. The biggest problem with having your estate as your IRA beneficiary is that the death distribution options will be severely limited.

Under IRS rules, your estate is not considered a “designated beneficiary” which means it has no life expectancy and can’t take advantage of the “stretch IRA” concept. So, if you die before your required beginning date (April 1 of the year after you turn age 70 ½), the IRA will have to pay out all funds to the estate within five years. If you die after your required beginning date, your IRA will have to make distributions to the estate over your remaining single life expectancy. What this all means for the beneficiaries who eventually get your IRA funds through your estate is that they’ll have to take the funds sooner, and thus likely pay more taxes than if you had named than as the direct beneficiary of your IRA.

A living beneficiary named your IRA beneficiary is guaranteed the stretch IRA if they want it. They are allowed to stretch required distributions over their life expectancy using the IRS Single Life Expectancy Table. This is a far better option that having the IRA funds funnel through the estate.

- By Joe Cicchinelli and Jared Trexler

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The 3 Categories of IRA Beneficiaries You Must Know

There are three categories of beneficiaries that might want to stretch distributions from their inherited IRAs. A beneficiary's options will depend on which category they find themselves in.

1. The Estate - this category has two categories of its own.

• Account owner died before age 70 ½ - the beneficiaries of the estate must use the 5-year rule
• Account owner died after age 70 ½ - the beneficiaries of the estate must use the remaining life expectancy of the deceased account owner, had he lived, for calculating required distributions

2. A Trust - If the trust is the only beneficiary named on the beneficiary form then there is only one beneficiary of the retirement account - the trust. There are many nuances when determining the age to use for calculating required distributions, but it will NOT be the age of each trust beneficiary since you only have one beneficiary. It is recommended that the trustee of the trust work with an advisor with specialized knowledge in this area and that may not be the attorney who drafted the trust. One key point to remember - DO NOT TRANSFER THE IRA ASSETS INTO THE TRUST - either during life or after death. That will be a taxable distribution and there will be no more retirement account.

3. Individual Beneficiaries - This is generally the best category for a beneficiary to be in. The inherited account should be split into inherited accounts for each beneficiary by the end of the year after the death of the account owner. Then each beneficiary can use their own age to stretch distributions over their lifetime.

There is one thing that is common to all beneficiaries. That is the titling of the inherited account. The deceased account owner’s name should remain in the title.

For example: John Smith, deceased, IRA for the benefit of - the estate, or the trust, or the individual beneficiary - whoever inherited the account.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Beverly DeVeny and Jared Trexler

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Slott Report Mailbag: Can I Contribute to a Roth IRA AFTER a Backdoor Roth IRA Conversion?

This week's Slott Report Mailbag comes to you from the Manchester Grand Hyatt in San Diego, California and Ed Slott's 2-Day IRA Workshop, Instant IRA Success. We answer questions on Roth IRA contributions and more - and as always, we suggest you work with a competent, educated financial advisor who can steer you to a safe, secure retirement.

1.

If a person does a backdoor Roth IRA conversion, can he or she contribute to it thereafter?

Answer:
Yes, as long as you qualify to make a tax-year Roth IRA contribution. For example, you would need to have compensation and income below certain levels to be able to make a tax-year Roth IRA contribution of $5,500 for 2013 (or $6,500 if age 50 or older).

2.

Hi,

I'm hoping you can help me with this question, and your website is very good and worth joining in my opinion.

I have an acquaintance through a catholic non-profit organization, who is a sister in the convent. Before she became a sister, she worked for a corporation and has an IRA account as the result of a 401(k) plan rollover. She is approaching age 70 ½ and will need to take an RMD (required minimum distribution). The problem is that any income received by any of the sisters in the convent could conceivably harm their non-profit status.

Can you tell me if you have had any experience with this situation, and is there a workaround that you may be aware of?

Thank you for your help!

Answer:
She may want to consider doing a direct IRA distribution of up to $100,000 to a qualified charity (known as a qualified charitable distribution or QCD). The amount will be tax-free to the IRA owner. This provision is only available to those age 70 ½ or older at the time of the distribution and is set to expire at the end of this year. Other than this provision, IRAs cannot be gifted or assigned during the lifetime of the account owner. Such a transfer would be taxable to the account owner and the recipient would not have a tax-deferred account.

3.

Ed,

When my daughter converts my wife and my IRAs to inherited IRAs after we die, is she required to begin RMDs as soon as she converts them or can she wait until age 70 ½? Also, is she required to make RMDs on her inherited Roth IRAs?

Thanks.

Answer:
Assuming your daughter wants to have a stretch IRA, when inherited IRAs are created after your death, RMDs will have to be taken beginning the year after your death. This is true for both traditional and Roth IRAs.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli, Beverly DeVeny and Jared Trexler

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IRAs and Wills Don't Mix

A Will is a legal document under state law where you name a person to manage your estate and divide your property after you die. Property in your estate must pass through “probate”, which is the process under your state’s law of how your estate is administered and who gets your property. Ideally, you should have a Will. If you don’t, then state law will decide who gets your property after you die. That might not be what you want, so it’s better for you to decide who gets what by having your own Will.

If you also have an IRA, you probably named a beneficiary of that account on the custodian’s beneficiary form. The IRA beneficiary form decides who gets your IRA after your death; not your Will. The only time your Will would control who gets your IRA is if your estate is the beneficiary. Generally, it’s not a good idea to name your estate as the beneficiary of your IRA.

Regardless of whether you have a will or not, if your estate is the beneficiary of your IRA, then your IRA must go through the probate process. That could be costly and time consuming. But far worse than that, when the estate is the beneficiary of an IRA, the death distribution options are limited and your IRA funds will have to be paid out more quickly.

Let’s say your estate is the beneficiary of your IRA and your children are the beneficiaries of everything in your estate. If you die at age 65, your children who get your IRA through your estate will only have 5 years to distribute those funds out of the IRA. They can’t use a stretch IRA and stretch distributions over their own life expectancies because the estate was the beneficiary of your IRA. An estate does not have a life expectancy. If we instead assume you die at age 75, then your children will have to take death distribution out over your remaining life expectancy. That’s not ideal because your children’s life expectancies are much longer than yours because they’re younger. What this means is that they’ll have much less time to deplete the IRA versus if they could use their own life expectancies (the stretch IRA). Again, the estate as IRA beneficiary put them in a bind by prohibiting them from using the stretch IRA.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Joe Cicchinelli and Jared Trexler

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IRAtv: International Tax Questions Involving Retirement Accounts

We receive questions every day involving international tax issues as they relate to retirement accounts. Does someone need to name a United States citizen as the benefi

ciary of his/her IRA? Is the Stretch IRA option available for non-U.S. citizens? Can someone combine his/her foreign retirement plan with his/her IRA?

Ed Slott and Company IRA Technical Consultant Jeffrey Levine answers all of these questions and more in this IRAtv YouTube video on international tax questions relating to retirement accounts. Make sure to subscribe to Ed Slott and Company's YouTube page here to receive email notifications on posted informational videos.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Jeffrey Levine and Jared Trexler

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Slott Report Mailbag: Will Congress Renege on the Roth IRA's Tax-Free Deal?

We understand the public's apprehension with those in Washington, D.C., and this week we received many questions on recent Congressional action and what may be in store for the future. This week's Slott Report Mailbag examines two issues Congress has not taken a stand on (and in our opinion won't for fear of public outcry and backlash) - the Roth IRA's tax-free distribution power and the Stretch IRA.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Send questions to [email protected]

Ed,

I have read your books and watched a couple of your seminars. It made sense for me to convert our IRAs to Roth IRAs, which we did in 2010, and paid the taxes in 2011 and 2012. Unfortunately, I am reading and hearing on an almost daily basis that the government is going to start going after private retirement accounts.

In your opinion, how safe are our Roth IRAs from some type of government interference? It would certainly seem unfair to tax Roth IRAs again since the contributions have already been taxed.

Thanks,

Gary

Answer:
One of the reasons that some people won’t convert their IRA money to a Roth IRA is that they don’t trust the government to keep the tax-free deal. While Congress has the right to change the rules, if they ever did, they would likely grandfather or exempt existing accounts from the new rules. In addition, the only funds in a Roth IRA that could be taxed would be the earnings in the account.

2.

We are considering the "Stretch" process for the future of our IRAs. Does it look to you that this may be eliminated by Congress? Also, who will enforce and carry out our stretch wishes when we're gone?

Answer:
The stretch process for taking death distributions from retirement plans using the beneficiary’s single life expectancy is in the tax law. While we cannot predict the future, it seems highly unlikely that Congress would eliminate it. It is up the beneficiary of the account to follow all the IRA rules once they inherit the account.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Inherited IRA Rules, Pro-Rata Tax Rule Highlight Mailbag

This week's Slott Report Mailbag includes your questions (and our answers) on inherited IRA distributions, SEP IRAs and the pro-rata tax rule. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Hello Ed,

Are you able to answer a question related to an inherited IRA?

Send your questions to [email protected]

Here is the issue. I have inherited an IRA from a deceased brother. It is a modest amount of money, about $25k. I am 55 years old. My brother was a few years younger. My question is this. Must I begin to take an annual distribution immediately or should I wait until after age 59.5? Once I begin to take my distributions, are the minimums determined by my age or my deceased brother's age? And lastly, is there a penalty for distributions before I turn 59.5.

Thanks for your enlightened guidance.

Paul

Answer:
Generally you MUST begin taking required distributions from an IRA that is inherited from someone other than your spouse beginning in the year after the death of the account owner. You use your single life expectancy using your age as of the end of the year. This option is often called a stretch IRA. There is never a penalty when taking distributions from an inherited IRA regardless of your age.

You have a second option on how to take the money from the inherited IRA. You can choose the 5-year rule where the funds must be distributed by December 31 of the 5th year after your brother died. Assuming he died in 2012, the deadline would be 12/31/17. During this 5-year period, you can take the money out however you’d like. There is no penalty as long as the account is emptied by the end of the fifth year.


2.

I have an IRA worth $130,000 with $2,000 in basis, and this IRA does not receive contributions. I also have a much larger SEP that receives regular contributions. Can I move $128,000 of IRA into the SEP and just yank the $2,000 IRA balance without tax consequences?

Rex

Answer:
Whether you can move non-SEP money into your SEP depends on the custodian. The IRS allows it, but some custodians insist on keeping SEP money separate from other IRA funds.

You cannot just take the $2,000 basis tax-free because of the pro-rata tax rule that applies to IRAs. Basically, you or your CPA must add together the balances of all your IRAs, including any SEP and SIMPLE IRAs. Then,
you take all your basis and divide it by the total of all the balances in all your IRAs. The percentage you get is the percentage of your distributions for the year that are income tax free. This formula is found in IRS Form 8606. 

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Joe Cicchinelli and Jared Trexler

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Ed Slott's Webcast: 5 Biggest Stretch IRA Mistakes

Ed Slott's FREE Webcast, The 5 Biggest Stretch IRA Mistakes, is now streaming at www.IRAhelp.com through March 23. You can register and listen immediately to the 5 missteps that trigger huge taxes and destroy inherited IRAs. The STRETCH IRA is one of biggest (if not the biggest) benefit in the tax code, so make sure you learn the steps necessary to preserve a financial legacy with this 20-minute webcast.

Click Here to register or go to www.IRAhelp.com for more information.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Jared Trexler

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Ed Slott Video: Stretch IRA Elimination Proposal

Ed Slott, America's IRA Expert, talks about a once-proposed (and recently dropped) provision in the Highway Investment Job Creation and Economic Growth Act of 2012 that would have destroyed the Stretch (inherited) IRA. This provision would have killed a financial legacy for beneficiaries. Ed Slott discusses the provision and how it indicates Congress' line of thinking with IRAs, and more specifically, Stretch IRAs. He also mentions proactive planning strategies to simulate the benefits of a Stretch IRA.

2014 Retirement Guide Helps You Save and Stretch Wealth

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Stretching Your IRA

If you don't need all the funds currently in your IRA you might want to "stretch" them. This refers to the process of extending the term of your IRA over multiple lifetimes through the use of existing distribution rules, the power of tax beneficial compounding and sound estate planning techniques.

The stretch maximizes compounding.

The best way to do this with a traditional IRA is to leave it alone and then only withdraw annual required minimum distributions (RMDs) from it once you attain age 70 ½. No distributions from a Roth IRA are required during your lifetime, so if you have one, all the money can stay there and continue to grow tax-free. In both cases, the objective is for the bulk of the funds to be inherited by your heirs, lasting through their lifetimes, while continuing to generate additional wealth through those years.

All the fun begins when you die. (isn’t that always the case?) Your beneficiary will have to take RMDs based on their single life expectancy commencing in the year after your death. This is also true for a Roth IRA. The only difference is that distributions from a Roth IRA will be fully tax-free, provided at least five tax years have passed since you first established a Roth IRA. Until that time, any earnings that are distributed will be subject to tax (but don’t worry about this too much, as earnings are the last dollars distributed from a Roth).

To the extent your surviving spouse is the beneficiary of your IRA he or she can roll some or all of it over into his or her own IRA or simply keep it in your account and be subject to the RMD rules as a beneficiary. In the latter case, if you die before attaining age 70 ½, your spouse can wait until the year you would have reached age 70 ½ to begin to begin taking mandatory payments if he or she is your sole beneficiary.

If you are looking to stretch the IRA over a long period of time you might want to consider naming a child, grandchild, or other younger individual as beneficiary. Doing so will result in a smaller annual distribution due to their longer life expectancy periods, leaving more assets in the IRA with the opportunity to generate additional wealth for the beneficiary.

If the thought of leaving younger beneficiaries with direct control over how rapidly funds can be withdrawn from your IRA following your death distresses you, consider using an intervening trust as beneficiary to control the flow of dollars to these individuals. This will cost you a bit more, but it will be well worth the money if it puts you at ease. You’ll need to employ the services of a qualified financial advisor or attorney to help put this in place, as the rules here are very stringent.

If you are inheriting an IRA make sure the new account is titled correctly. For example, Bill Lee dies and his two children are named equally as his primary beneficiaries. By December 31 of the year following the year of death, two separate beneficiary-inherited IRAs must be established and completely funded (one half to each) and the title of the inherited IRAs should read:

Bill Lee IRA Deceased, [date of death], FBO (name of the child). 

The account title can in no way reflect the beneficiary as direct owner, otherwise the assets will be considered distributed and subject to income tax, as applicable.

Professor Albert Einstein once said “the most powerful force in the universe is exponential notation.” We know this within the context of the compounding of money. You should know it the same way and one of the best examples of this is a stretch IRA.

2014 Retirement Guide Helps You Save and Stretch Wealth

-By Marvin Rotenberg and Jared Trexler

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