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Ed Slott welcomes you to The Slott Report, your source for IRA, retirement and tax planning information.

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.

IRA plan agreement rulesWhy?

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

What Type of Annuity Can be Rolled Over to an IRA?

This week's Slott Report Mailbag looks at potential annuities that can be rolled over to IRAs
as well as a follow-up question on a younger spouse inheriting an IRA. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
IRA questions
Send questions to mailbag@irahelp.com


I have small annuity account of approximately $4,000.00.

I would like to be able to access funds from time to time, but to cash this account (i.e. close it) out, the company would pay me only about half of it.

Is it possible to avoid this by rolling it over to an IRA? Also, can I still get an IRA at my age of 82?

Would appreciate help.

Joan Fogel

If the annuity is a non-qualified annuity (an annuity that’s not held inside an IRA or company retirement plan), it cannot be rolled over to an IRA. However, if the annuity is a qualified annuity (such as an IRA annuity), then it can be rolled over or transferred into an IRA. You can open an IRA at any age, including after age 70 ½, and fund it with a rollover or transfer from another IRA or company retirement plan.


This question is based on Beverly DeVeny’s post on a younger spouse inheriting an IRA.

First: why would the spouse establish an Inherited IRA? And in your explanation you mention why she is not subject to RMDs (required minimum distributions).

Second: I went back to Ed's 2012 edition of The Retirement Savings Time Bomb. On page 136 Rollover, Ed writes: "Under the tax code, an inherited IRA is an IRA inherited by someone other than your spouse."

Please clarify. Thank you.

John Recchia

While technically, an inherited IRA is an IRA inherited by a non-spouse beneficiary under the Tax Code, a spouse can basically be treated as a beneficiary by not rolling over or electing to treat the IRA as her own IRA. This IRA is often called an inherited IRA or a beneficiary IRA. A younger spouse beneficiary who inherits an IRA from her deceased spouse but needs to use the IRA funds before age 59 ½ should not do a spousal rollover. The reason is so she can avoid the 10% early distribution penalty that would apply if she did a spousal rollover before age 59 ½.

- By Joe Cicchinelli and Jared Trexler

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 info@irahelp.com

    what to check on an IRA beneficiary form
  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

Why You Should NOT Name Your Estate as IRA Beneficiary

naming estate as IRA beneficiaryYou'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

Aggregating Inherited IRAs

aggregating inherited IRAsThe question came up recently about combining inherited IRAs. The general rule is that you can combine IRAs that you have inherited from the same person. So if you inherited two IRAs from your Mom, you could combine them into one inherited IRA. But if you inherited an IRA from your Mom and inherited an IRA from your Dad, you could not combine them. Sounds simple, right? Let’s take a look at some scenarios.

Dad had two IRAs when he died. The beneficiary form for one IRA names his children. The beneficiary form for the other account names a trust (or the estate). The IRA will be distributed out of the trust into inherited IRAs for the children who are the beneficiaries of the trust (or the estate). You now have two IRAs that you have inherited from Dad – or do you? These IRAs should generally not be combined for two reasons. One, technically you have two different beneficiaries – you and the trust (or the estate). Two, unless you are the oldest trust (or estate) beneficiary, you will have two different life expectancies for the two inherited IRAs – one will use your single life expectancy, the other will use the single life expectancy of the oldest trust (or estate) beneficiary.

Mom had two IRAs when she died. One was her own IRA that names you as the beneficiary. The other was the IRA she inherited from her sister where she has named you as the beneficiary. These inherited IRAs cannot be combined. Here you will definitely have two different life expectancies. On the IRA you inherited from Mom, you will use your own life expectancy using your age in the year after Mom died. On the IRA that Mom inherited from her sister, you will continue to use Mom’s remaining life expectancy.

One final example; your uncle has an IRA that names you and your sister as the beneficiaries. Your sister dies two months after your uncle dies. You now inherit the entire IRA, both your half and your sister’s half. Again you will have two different life expectancies. You will be able to use your own age for your half of the IRA. On the other half you will have to use your sister’s age since she was alive on the date your uncle died. You will not be able to combine these IRAs.

In all of these scenarios the RMD will have to be calculated and distributed separately for each IRA. You can never take the RMD for an inherited IRA from an IRA that you own or vice versa. IRAs inherited by non-spouse beneficiaries have RMDs beginning in the year after the death of the account owner regardless of the age of the beneficiary. Beneficiaries under the age of 59 ½ never have to pay the 10% early distribution penalty. But if they do not take their required distribution, they will be subject to the 50% penalty for a missed distribution.

- By Beverly DeVeny and Jared Trexler

Happy Parenthood! 3 Tax Planning Moves To Consider Making For Your New Child

3 tax planning moves for new childI’m still having a hard time believing it's true, but by the end of tomorrow, I'm going to become a father for the first time. I am obviously super excited and can't wait to experience all the joys – and even some of the pains – of fatherhood. I know that being a father is nothing to take lightly and there are many responsibilities. Some of the responsibilities are financially-oriented and for a few of those, there are tax efficient ways of achieving one's goals.

Now obviously, everybody’s situation is different, but below are 3 tax-planning moves I plan to make as soon as possible once I become a father. Perhaps one or more of them is relevant for you and your planning.

  1. Fund a 529 Plan – 529 plans are great way to save money for a child’s education. These accounts, like IRAs, allow you to accumulate funds on a tax-favored basis. Although there is no federal income tax deduction for contributions to a 529 plan, funds grow tax-deferred while in a 529 account and, if distributions are used to pay qualified higher education costs, those distributions are tax-free. Plus, although there is no federal income tax deduction available, many states offer a state income tax break for contributions made by its residents to its own plan. Just like IRAs, the earlier one starts saving in a 529 plan, the better off they will be. With higher education costs continuing to sky rocket, I’m going to start as early as I can!
  2. Attempt to Establish a Roth IRA as Soon as Possible – There are no minimum age requirements to open a Roth IRA. In theory, even a newborn can have one. The key, however, is that a person, regardless of age, needs some sort of “compensation” to make a Roth IRA contribution. Usually, that compensation is some sort of earned income. Now you might ask, “How can a newborn have earned income?” Well, there are a number of ways. Perhaps you own a business and you use your child’s likeness on marketing material. You could pay them for that, legitimately of course. Then, an amount equal to that earned income could be contributed to their Roth IRA (provided they meet the other requirements). I personally have no idea when my child will generate earned income. Maybe it will be soon. Maybe not for 20 or more years. That said, whenever the time comes, I am going to do everything in my power to start his tax-free retirement savings off as early as possible, even if it means I have to make a contribution to his Roth IRA with my own money.
  3. Update my Beneficiary Forms – Updating one’s beneficiary forms doesn’t sound like a tax-planning move, but instead, simply an estate planning move. In reality, it is both. Designated beneficiaries – generally living, breathing people named on the beneficiary form – are able to stretch distributions over their life expectancy. This helps an account grow tax-deferred as long as possible and minimize the tax impact on any distributions.
If something were to happen to me in the near future and my son were to inherit my retirement funds, he would be able to distribute those funds over more than an 80-year period.

- By Jeffrey Levine and Jared Trexler

Don't Just "Forget" About the 60-Day IRA Rollover Window ... It Will Cost You

60-day IRA rollover mistakeA taxpayer learned a costly lesson recently when he forgot to complete an IRA rollover within the 60-day time fame. He asked the IRS for more time to do the rollover, but they turned him down. As a result, his IRA distribution couldn’t be rolled over tax-free so that meant his IRA distribution was taxable.

A person we’ll call “Tom” received a distribution from his IRA in early March 2013. He later deposited that amount into his checking account about eleven days later. In mid May 2013, he tried to roll over that amount into another IRA, but he was told that the 60-day period had expired four days ago.

He realized that if he couldn’t do the rollover, his IRA distribution would be taxable. Not wanting to pay the taxes, he applied to the IRS for a private letter ruling (PLR), asking the IRS to give him more time to complete the rollover. He told IRS he was aware of the 60-day limit, but also admitted that he forgot to timely do the rollover and let the 60-day clock expire.

The IRS has the authority to waive the 60-day period and give taxpayers more time to complete a rollover in certain circumstances. Taxpayers must request a PLR from IRS asking for a waiver of the 60-day period due to reasonable error.

Generally, the IRS gives taxpayers more time to do a rollover when there was some casualty, disaster, or some other event beyond the reasonable control of the individual that prevented him from timely doing the rollover. The IRS looks at all the facts and circumstances such as financial institution or advisor error, and other outside factors such as a death in the account owner’s family, health problems, disability, and other factors beyond the person’s reasonable control.

In this case, Tom’s only excuse was that he simply forgot to do the rollover within 60 days. He didn’t claim that he was suffering from mental health issues or that some stressful event happened to him during those 60 days; he simply said he forgot. So, because he couldn’t come up with any extenuating circumstances that prevented him from doing the rollover, the IRS had no choice but to deny his request for more time to complete the rollover. (PLR 201428012, July 11, 2014).

Simply forgetting to do the rollover is not a good enough reason for the IRS to give you more time to do it.

- By Joe Cicchinelli and Jared Trexler