3 Retirement Plan Life Expectancy Tables

There are three life expectancy tables used by IRA and employer plan account owners and beneficiaries. These tables were last updated by IRS for optional use in 2002 and were mandatory in 2003. You cannot choose which table you would like to use. Each one must be used in certain situations.

Table 1: Single Life Expectancy Table
This table must be used by all beneficiaries of inherited accounts. Generally a beneficiary looks up their age in the year after the account owner dies to find their life expectancy factor (you look up the age the beneficiary is on the last day of the year). Beneficiaries use this factor to calculate the required distributions from the inherited IRA. They only go to this chart one time. Each year after that, the life expectancy factor is reduced by one.

Beneficiaries can name their own beneficiaries (successor beneficiaries). If the beneficiary dies while there is still a balance in the retirement account, the successor beneficiary continues to take distributions using the reduce-by-one method established by the original beneficiary.

This table will generate the largest required distribution of all three tables.

Note: The rules for using the Single Life Table are different for beneficiaries who inherit through a trust or an estate, and there is another set of rules for spouse beneficiaries who do not move the inherited retirement funds to their own accounts.

Table 2: Joint Life Table
This table is used only by account owners with a spouse that is more than 10 years younger and when the spouse is the sole beneficiary of the IRA. The account owner finds the factor using their age and their spouse’s age (the age they are at the end of the year). The account owner will go back to this table each year to look up their factor as long as they continue to meet the criteria.

This table will generate the smallest required distribution of all three tables.

Table 3: Uniform Lifetime Table
This table is used by most account owners, except as noted for Table 2. It does not matter who the beneficiary of the account is. This table is never used by a beneficiary. The account owner looks up the age they will be at the end of the year on the table and goes back to the table each year to find the factor for the current year.

It is important that you know which table you need to use so that you can accurately calculate required distributions from your retirement accounts. Use of the wrong table could result in too much money being paid out for the year. That will unnecessarily deplete your retirement accounts and increase your income tax bill.

On the other hand, use of the wrong table could also result in too little being paid out for the year. That could lead to a penalty of 50% (that is NOT a typo) of the amount not distributed. Neither one of those results is a good thing.

- By Beverly DeVeny and Jared Trexler

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Join us TODAY to Get Your Questions Answered!

Instead of answering several questions in today's Slott Report Mailbag, we are going to answer many more than that in today's Slott Summer eSymposium - an interactive, online educational experience from 2-4 PM ET.

This FREE event includes:

• Ask your questions to America's IRA Experts in a written chat format
• Watch a special video library with information on NUA (net unrealized appreciation) and 60-day IRA rollovers
• Receive special offers on Ed Slott books and programs

You should register now (click here to register) and make sure you are available and online from 2-4 PM ET today so you can get your questions answered, learn from the questions of others, watch a video library and receive offers on Ed Slott's 2-Day IRA Workshop and Ed Slott's 2014 Retirement Decisions Guide.

Join us today!

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The IRA Owners' Bill of Rights

Yesterday, the IRS released a "Taxpayer Bill of Rights," to help organize "the dozens of existing rights in the Internal Revenue Code into ten fundamental rights," as well as make the "rights clear, understandable, and accessible for taxpayers and IRS employees alike."

With that in mind, it occurred to me that IRA owners would benefit from an "IRA Owners’ Bill of Rights," of sorts, to help understand certain aspects of their retirement accounts. Below is a list of 10 key rights that any and all IRA owners should be aware they have. Before we get to that, however, just two quick, important notes regarding the list:

1. This is an IRA Owners’ Bill of Rights list. In some cases, the rules for plans, like 401(k)s, are different.
2. These rules are the rules that are allowed under the tax code. In certain situations, your “rights” can (but may not necessarily) be limited by your IRA custodian.

The IRA Owners’ Bill of Rights

1. You have the right to move your IRA account at any time, and as often as you like, from one IRA custodian to another via a direct transfer. Note that this right does not apply to 60-day rollovers.

2. You have the right to convert any or all of your traditional IRA to a Roth IRA at any time. There are no age limits, income limits, earnings requirements, dollar amount limits, etc. It’s your call when and if to do it, and if so, for how much. Period.

3. You have the right to recharacterize (undo) all or any portion of a Roth IRA conversion for any reason up until October 15 of the calendar year following the year you convert. This is one of the few tax-planning strategies you can change your mind about well after the fact and essentially go back in time as if it never happened.

4. You have the right to name anyone you want as your beneficiary. Unlike certain qualified plans subject to ERISA rules, like 401(k)s, your spouse does not have to be your beneficiary. Your beneficiary can be your spouse, but it could also be your children, grandchildren, a charity, a trust, or any other person or entity you so choose. (Note: If you live in a community property state, your spouse may automatically be entitled to a portion of your IRA under state law)

5. You have the right to change your beneficiaries at any time. This is one of the rights you should always be sure to exercise when circumstances change. Anytime there is a birth, death, marriage, divorce or other life event, you should check to make sure your beneficiary form still aligns with your wishes.

6. You have the right to take a distribution from your account at any time. There is nothing in the tax code that prevents you from taking money out of your IRA when and if you want it. That said, there are obviously consequences for any actions you take, such as the 10% early distribution penalty for pre age 59 ½ distributions, so just be smart about when you choose to exercise this right.

7. You have the right to withhold 0%, 10%, or more than 10% from your IRA distributions. This differs from plan rules, where there is generally a mandatory withholding of 20% on all pre-tax distributions. Just because you have the right to forgo withholding, though, doesn’t mean you should. Always check with your tax professional to make sure that your withholding choices are in line with your overall tax plan so you avoid unnecessary penalties.

8. You have the right to invest in just about anything you want, other than life insurance, S-Corp stock and collectibles.

9. Your have the right to do whatever you want with your retirement funds, after you distribute them. Want to purchase life insurance or S-Corp stock? No problem. Just take a distribution from your IRA. Once the money is out of your IRA and you’ve paid tax on it, it’s “regular” money… and best of all, it’s yours to do whatever you want with!

10. You have the right to make good decisions that will save you valuable tax dollars and make your retirement account worth much more over the course of your life and the lives of your beneficiaries. Similarly, you also have the right to make poor choices that will cost you and your loved ones valuable tax dollars. The choice of which of these rights to exercise is up to you, so always make sure you evaluate your decisions carefully, have a plan and stick to it. And when in doubt, remember that you also have the right to seek advice from a qualified professional.

- By Jeffrey Levine and Jared Trexler

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Do My Retirement Plan Funds Affect My Social Security Benefits?

The Slott Report Mailbag returns to answer a question on the benefits of IRA trusts as beneficiaries (we've covered the advantages and disadvantages in several articles chronicled here), the details involved when moving money between IRAs and company plans and whether retirement plan funds affect your Social Security benefits. 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]

Is there any advantage to leaving my IRA to the family trust vs. using the IRA beneficiary form? My wife is primary 100% and my son is secondary 100%. My CPA said keep it that way via the form. My attorney advised me to make the family revocable trust the beneficiary. I live in Massachusetts. My wife will need the IRA for income.

Answer:
The primary advantage of naming a trust as your IRA beneficiary is that you can control the IRA distributions after your death. You will have to name the trust as beneficiary using the IRA beneficiary form. You cannot have the family trust own your IRA during your lifetime.

The disadvantage to using a trust is that required distributions to the trust beneficiary must be made using the age of the oldest trust beneficiary and they must use the Single Life Table. If your spouse inherits the IRA directly, she can move it to an IRA in her name and use the Uniform Lifetime Table to calculate her required distributions. She can name your son as her primary beneficiary and when he inherits the IRA he can use his own life expectancy instead of continuing to use the balance of his mother’s life expectancy.

You might want to clarify with your attorney the benefits of using the trust as the IRA beneficiary.

2.

Question: if I contribute to a traditional IRA won't that reduce the amount of my Social Security benefits? Even though FICA stays the same aren't our benefits based on AGI?

Answer:
Your Social Security benefits are based on your annual earnings. The amount you have in any retirement plan is not factored into that calculation. The taxation of your Social Security benefits is based on a formula that includes your AGI (adjusted gross income). Distributions from retirement plans will increase your AGI.

3.

If I move a rollover IRA back into a company 401(k) and then make a back door Roth conversion how long do I have to wait before I can move the money back out of the company 401(k) and into the rollover IRA?

Answer:
That will depend partly on what the 401(k) plan will allow you to do with the funds you rolled into the plan. On the IRA side, IRS Form 8606 has the pro-rata formula for distributions. You should check that out before moving the funds back to an IRA or check with a tax professional. You can find the form on the IRS website, www.irs.gov.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Joe Cicchinelli and Jared Trexler

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Your 3 Question Mid-Year IRA Checkup

So, you make your way into the financial "doctor's" office, armed with all of your bank and retirement account statements. What should you expect from the meeting - what burning questions should you and your financial team have the answers to? I examine the mandatory 3 questions that must be asked and answered below. 

1. Have you already made your 2014 IRA/Roth IRA contribution?
If you’re eligible to do so and haven’t already made a (full) contribution to your IRA or Roth IRA for 2014, there’s no better time to do so then now. There are countless articles that espouse the benefits of early-year contributions vs. those made later in the year - and I even made a short video on this topic for The Slott Report earlier this year - but maybe you simply didn’t have the funds to make a full IRA contribution on or close to January 1 earlier this year. That doesn’t mean that you should wait until next tax season to make a planned contribution though.

If you have the ability to make a contribution now, don’t wait. Maybe you’ve been able to sock away some free cash over the first half of the year, or maybe that tax refund finally came in … whatever the reason, if you’re able to make your contribution now, don’t wait. Sure, it would have been better if you had been able to do so on January 1, but doing so today is still much better than making your contribution at the end of this year or next year at tax time. If you can’t afford to make a full IRA contribution of $5,500 ($6,500 if you are 50 or older by the end of this year), then consider making smaller periodic contributions to your account instead. At the heart of it, it boils down to these simple well-known facts:
1) Something is more than nothing
2) Today is better than tomorrow

2. Have you considered a 2014 Roth IRA conversion?
We’re now about half-way through the year, so by this point, although some things are still bound to change, you probably have a pretty decent idea of what your income is going to look like for the year. With that in mind, you can do a little planning with your tax and/or financial advisor, or some simple calculations on your own to see if a 2014 Roth conversion may benefit you. Remember, making a Roth conversion adds income to your tax return for the year, so it will increase your current tax bill. Distributions in retirement, however, will generally be tax-free, and there are no RMDs for Roth IRAs, as there are for their traditional IRA counterparts.

Two more thoughts to keep in mind while you consider if a Roth conversion is right for you:
1) Roth conversions don’t have to be all or nothing. Partial conversions are allowed.
2) If you are unhappy with your Roth IRA conversion decision or the resulting tax bill for any reason, you can recharacterize (undo) your 2014 Roth IRA conversion anytime up through October 15, 2015.

3. Are you aware of all the new rules that may (or may not) affect you?
If there’s one thing constant in the IRA world, it’s change. It seems that nearly every year there are new rules that phase in and others that phase out. On top of all of that, there are always court decision, IRS rulings and other guidance that reshape the retirement account landscape. Some of the key developments that have occurred over the last year are:

1) The provision for qualified charitable distributions (QCDs) expired at the end of 2013 (although there’s a good chance Congress will renew it at some point, retroactively, for all of 2014)

2) In June of 2013, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. As a result, many same-sex couples are now considered married for federal income tax purposes. This includes the IRA rules.

3) In January of 2014, the Tax Court issued a landmark decision in Bobrow, in which it ruled the once-per-year IRA rollover rule applies in aggregate to all a person’s IRAs. IRS has said it will begin enforcing this decision as early as January 1, 2015.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Jeffrey Levine and Jared Trexler

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Choosing a Direct IRA Rollover Avoids 20% Withholding on Plan Distributions

If you're receiving a distribution from your employer's retirement plan, such as a 401(k) or 403(b) plan, you have the choice to roll over those funds tax-free to an IRA. There are two ways to do that: 1) by doing a direct rollover or 2) by an indirect (or 60-day) rollover. Generally, if you intend to roll over all of your company retirement plan balance to an IRA, the better way to do that is by using a direct rollover.

In a direct rollover, also known as a direct transfer, the funds are sent directly from your company retirement plan to your IRA. You have no control or use of the money in a direct rollover. Even if a direct rollover check is mailed to you, the check will be made payable to your IRA custodian for the benefit of your IRA (i.e., it’s not made payable to you personally). The direct rollover advantage is that the 20% withholding rules do not apply so your entire plan balance can easily be rolled over.

If you instead choose to have the company plan balance paid to you personally, then 20% will be withheld for federal income taxes. You can still roll over your entire plan balance, including the 20% that was withheld, within 60 days. This is known as an indirect or 60-day rollover. But the problem is if you want to roll over your entire company plan balance to your IRA, you’ll have to come up with the 20% that was withheld for income taxes from your own personal funds. That might be difficult especially if that amount is a lot of money. If you don’t roll over the 20% that was withheld, you’ll be taxed on it because you didn’t roll over that amount to your IRA. In hindsight, it would have been easier to simply have chosen a direct rollover to avoid the 20% withholding issue completely. You will recover the 20% withheld amount when you file your tax return.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By  Joe Cicchinelli and Jared Trexler

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How Many Beneficiaries Are There With a Trust?

You name a trust as the beneficiary of your IRA. How many beneficiaries are there of the IRA? One.

You name a trust as the beneficiary of your IRA. The trust beneficiaries are your six children. How many beneficiaries are there of the IRA? One - the trust.

That’s right. There is only one beneficiary. The children do not get to split the IRA. They do not get to use their own life expectancies, they all have to use the age of the oldest trust beneficiary. They do not get to choose whether to take stretch distributions or take their entire share in one lump sum. They are not the beneficiaries - the trust is the beneficiary.

Let’s change the scenario a little. You name a trust as the beneficiary of your IRA. Your spouse is the beneficiary of the trust. How many beneficiaries are there of the IRA? I am guessing you answered one and you would be correct. The TRUST is the one beneficiary of the IRA. Your spouse cannot take a distribution from the IRA any time he or she wants. Your spouse cannot ask the IRA to distribute more than the required minimum.

While the children or the spouse in these examples may not be able to request a distribution from the IRA directly, the trustee of the trust can. In many cases, a trust beneficiary is the trustee of the trust as well as the beneficiary. So the beneficiary/trustee can have the trust request a distribution that is payable to the trust. Then the beneficiary/trustee can have the trust make a distribution to them.

So, just to be sure we all have this right, when you name a trust as the beneficiary of your IRA, how many beneficiaries are there of the IRA? You got it - ONE - the trust. Consider the consequences of using a trust as an IRA beneficiary carefully. Make sure the results are what you would want for your spouse or your children.

2014 Retirement Guide Helps You Save and Stretch Wealth

- By Beverly DeVeny and Jared Trexler

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