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Showing posts with label IRA beneficiary. Show all posts
Showing posts with label IRA beneficiary. Show all posts

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]

    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

Ruling to Remember: What NOT To Do When a Trust is the IRA Beneficiary

In Private Letter Ruling (PLR) 201425023, released by IRS on June 20, 2014, the IRS ruled that a surviving spouse who received IRA proceeds through a trust, which was the beneficiary of her deceased husband’s IRA, could not roll over the IRA funds she received because more than 60 days had passed since she received the funds. The IRS denied her request for more time to do the rollover because she didn’t provide sufficient proof of financial institution error. More importantly, the PLR is a good example of what not to do when a trust is the beneficiary of an IRA.

Facts of the PLR
IRA trust beneficiary“Ben” had an IRA and named a trust as the beneficiary of his IRA. The trustees of the trust were his two children. Ben’s wife “Ann” was the beneficiary of 25% of the assets of the trust. After Ben died, the entire proceeds of the IRA were paid to the trust as IRA beneficiary. The funds were deposited into the trust’s checking account. The PLR didn’t say who authorized the IRA distribution, but most likely Ben’s children as trustees ok’d the distribution.

Apparently, Ann had a problem with how the trust was interpreted and administered and started legal action against Ben’s children as co-trustees of the trust. Eventually, they worked out their differences. Ann and the trustees entered into a settlement agreement which said that the trust would attempt to establish a rollover IRA in Ann’s name for her 25% portion of the IRA funds that were distributed from the trust.

As a result of the settlement agreement, Ann opened an IRA in her name assuming that she would be allowed to roll over the amount she received from the trust. Shortly after the settlement agreement in October 2009, her 25% share of the IRA proceeds were paid from the trust and deposited directly (rolled over) into the IRA in Ann’s name. This distribution occurred after 60-days from when the entire IRA was distributed to the trust. Ann received a K-1 from the trust for 2009 showing a taxable distribution.

Ann must have realized that more than 60-days had lapsed since the IRA distribution was made from the trust, so she applied to the IRS for a waiver of the 60-day rollover period for financial institution error. While in the PLR request she referred to “financial institution error,” she really was blaming the trustees and their attorney for the delay, not the financial institution. Specifically, she claimed that the trustees and their lawyer had duties under state law to her as a beneficiary of the trust and that they failed to fulfill those duties.

She alleged that the trustees and their lawyer failed to fulfill their duties under state law when they allowed the entire IRA distribution to the trust. She also alleged that after the distribution, the trustees’ lawyer failed to timely inform the trustees and the IRA custodian of Ann’s rollover options as Ben’s spouse.

IRS Denies Waiver of 60-day Rollover Period
The IRS denied her request for a waiver of the 60-day rollover period. While not giving much detail, the IRS simply stated that the information and documentation that Ann submitted were insufficient evidence of financial institution error. So, the money she received from the trust and then rolled over to her own IRA was not eligible for rollover. As a result, the IRA distribution could not be treated as a tax-free rollover. It also likely created an excess IRA contribution.

Invalid Rollover Creates Excess IRA Contribution
In this case, Ann did the rollover before she requested the PLR. Either she assumed the funds were rollover eligible or she thought the IRS would give her a waiver of the 60-day rule due to the trustees and their lawyer’s alleged mistakes. She was wrong.

Without a 60-day waiver from IRS, the funds were not eligible to be rolled over to her IRA. The fact that she did roll over the money over means that the deposit is treated as a regular tax-year contribution for 2009. Assuming the deposit was more than $6,000 (the IRA contribution limit for 2009 for someone age 50+), then any amount above that is automatically treated as an excess IRA contribution. If an excess contribution is not timely removed by October 15 of the year after, it is subject to a 6% penalty each year until it’s corrected.

The 6% excess contribution penalty is reported on IRS Form 5329. If Form 5329 is not filed, the statute of limitations (normally 3 years) never begins to run adding more penalties and interest to an already costly situation.

Common Mistakes When a Trust is the IRA Beneficiary
While there are many good reasons to name a trust as the beneficiary of an IRA, the main reason is for control. If the IRA owner wants to control how the funds are paid out after he dies, a trust can do that.

Trusts are also often named as the IRA beneficiary for creditor protection purposes. In light of the June 2014 Supreme Court’s ruling in the Clark case where the court ruled that inherited IRAs are not protected in bankruptcy under federal law, more IRA owners may consider naming a trust as the beneficiary of their IRA to protect the money from the beneficiaries creditors.

Trusts by themselves are complicated. The IRA required minimum distributions rules are complicated too. When you mix the two by naming a trust as the IRA beneficiary, problems often occur. Below are some common mistakes that are made after an IRA owner dies with a trust as the beneficiary.

Paying Out Entire IRA to Trust
After the IRA owner dies, paying out the entire IRA to the trust should NOT be done, unless the trust says so. Only the required minimum distribution (RMD) needs to be paid to the trust, not the entire balance. If the entire IRA balance is paid to the trust (a nonsposue beneficiary), the trust cannot roll over the funds back into an IRA. The entire IRA distribution will be taxable.

After the IRA owners dies, the IRA should simply be retitled (transferred) into an inherited IRA for the trust, the same that would be done for any nonspouse IRA beneficiary. For example, the IRA could be retitled: “Jane Doe Family Trust as beneficiary of Jane Doe IRA” or something similar that identifies the deceased IRA owner and the trust as beneficiary.

Naming Family Members as Trustee of a Trust
Naming family members as trustee of trust has potential benefits and pitfalls. Family members will usually know the family dynamics and needs of the trusts’ beneficiaries and may be in better position to know when to make distributions than a third party trustee such as a bank that doesn’t know the family history. This is especially true in an accumulation (discretionary) trust where the trustees have to decide when to pay the IRA funds to the trust beneficiaries or retain them inside the trust.

One of the primary potential pitfalls is that the family members probably don’t have expertise in acting as a trustee and ideally should seek advice from professionals. If a disgruntled trust beneficiary questions whether the trustees are doing their job correctly, it certainly could cause friction in the family to say the least.

In PLR 201425023, it’s wasn’t clear whether the decedent’s children as co-trustees made a mistake, but the fact that the entire IRA balance was paid to the trust is suspect. One of the trust’s beneficiaries, the decedent’s wife, initiated legal action against the trustees which resulted in a settlement agreement. The odds that the settlement agreement caused problems in their family are pretty high.

Advisor Action Plan

  • Encourage trustees of a trust to not distribute any IRA funds without first getting professional advice.
  • Do not make a total distribution from the IRA to the trust after the IRA owner dies. Only the RMD needs to be paid out.
  • After the IRA owner dies, make sure the IRA is set up as an inherited IRA with the trust as beneficiary of the decedent.
  • Tell surviving spouse beneficiaries that whenever applying for a 60-day rollover waiver, doing a spousal rollover before the PLR request is received is risky. If the IRS denies the waiver, then an excess contribution will likely happen in the surviving spouse’s IRA.
- By Beverly DeVeny and Jared Trexler

What A Younger Spouse Should Do When Inheriting an IRA

Richard has an IRA and has named his wife Diane as the beneficiary. Richard dies unexpectedly at age 52. Diane is 50. What should she do with Richard’s IRA?

This is a case when the spouse should probably remain a beneficiary of the IRA. Here's why.

A beneficiary does not have to pay the 10% early distribution penalty on amounts withdrawn from the inherited IRA. If Diane needs to use IRA funds for any reason, she can take as much or as little as she wants and only pay income tax on the amounts she withdraws. She will not owe the 10% penalty. If Diane moves the inherited IRA into her own name, however, she will owe the penalty - unless one of the exceptions to the penalty applies.

A spouse beneficiary does not have required minimum distributions (RMDs) until the deceased account owner would have been 70 ½. Diane will have no RMDs until Richard would have been 70 ½ - 18 years from now. If she does not need any funds from the IRA, she can leave them in the account to continue to grow and compound, tax deferred.

Once Diane reaches the age of 59 ½, when she will no longer be subject to the 10% early distribution penalty on funds in her own retirement account, she can move the inherited IRA into an IRA in her own name. There is no deadline for a spouse to do this. She can make the IRA her own even if she has regularly taken funds out of the account.

Diane should be sure to make the funds her own before the year Richard would have been 70 ½. Here's why.

Diane, as a beneficiary, would have to use the Single Life Table for calculating her RMDs from the inherited IRA. The RMDs would be larger each year than they would be if Diane owned the account and used the Uniform Lifetime Table. As a result, Diane would be paying more in income tax each year, and she would be depleting the account at a faster rate than she would have to if the account was an owned account.

Plus, Diane’s beneficiaries of the inherited account would not be able to use their own life expectancies at Diane’s death. Instead, they would have to continue using Diane’s life expectancy. Her beneficiaries would be successor beneficiaries - a beneficiary’s beneficiary. They would not be an original beneficiary. As a result, the annual distributions would almost certainly be larger, the beneficiaries would owe more in income tax each year, and the account would be depleted at a faster rate.

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: What Happens if I Accidentally Miss My RMD?

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.

ed slott IRA questions
Send questions to [email protected]

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?


M. Daniel Professor

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.


How can I setup a minor as a beneficiary of an IRA and protect the funds from the parents?

Thank You!

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.


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 it 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,


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

Supreme Court: Inherited IRAs are NOT Retirement Accounts ... and What This Means For You

In a landmark decision last Thursday, the Supreme Court ruled unanimously, 9-0, that inherited IRAs are not protected in bankruptcy under federal law.

The decision has far reaching ramifications and, depending on your heirs' specific circumstances, may give you pause as to who — or what — is the best beneficiary for your retirement accounts.

A bit of background
In 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). While, on the whole, the law was designed to make filing for bankruptcy less appealing, it had a silver lining for retirement account owners. BAPCPA afforded a great deal of bankruptcy protection to "retirement funds," providing IRAs and Roth IRAs with a cumulative $1 million inflation-adjusted (currently $1,245,475) exemption and employer-sponsored plans with an unlimited exemption.

While that may seem fairly straightforward, the seemingly innocuous use of the phrase "retirement funds" in the bankruptcy statute muddied the waters. Bankruptcy trustees eventually began to challenge the exempt status of inherited IRAs, citing that they weren't "retirement funds" and thus, not protected in bankruptcy under the federal bankruptcy rules. For the past few years, various courts have weighed in on the issue, delivering anything but consistent decisions. Indeed, even the very case brought forth to the Supreme Court and decided last Thursday, Clark v. Rameker, had its own roller coaster of a ride before reaching the High Court.

It started in 2010, when Heidi Heffron-Clark filed for Chapter 7 bankruptcy protection, but listed her inherited IRA, worth about $300,000 at the time, as an exempt asset (unavailable to creditors). The bankruptcy trustee and Clark's creditors objected to this exemption and the Wisconsin bankruptcy court which first heard the case agreed, ruling that Clark's inherited IRA wasn't protected in bankruptcy and was an available asset that could be used to satisfy her creditors. Clark appealed to a federal district court, which reversed the bankruptcy court's initial decision. Later however, the bankruptcy trustee appealed the district court's decision to the 7th Circuit Court of Appeals, which reversed the district court's decision — putting things back to where they had started — once again holding that Clark's inherited IRA wasn't protected.

Ultimately, with few other options, Clark appealed that decision to the Supreme Court, which brings us all the way to last week’s big decision.

The Supreme Court's conundrum
In deciding the Clark case, the primary issue before the Supreme Court was whether or not an inherited IRA is a retirement account. At first glance, that might seem crazy. After all, an inherited IRA is an inherited individual retirement account. It says retirement in the name. That said, there were, in fact, some very fair arguments to be made on both sides of the coin.

On the one hand, if someone owns a house, and that house is left to their child, would anyone argue that it isn't a house anymore? Why should an IRA be any different? If it was a retirement account for the original owner — which no one would dispute — then why should its character change merely because the owner dies?

On the other hand, there are a number of reasons why an inherited IRA should not be considered a "retirement" account and ultimately, the Supreme Court felt these factors outweighed their counterparts. Specifically, the Supreme Court felt the following characteristics of inherited IRAs weren't characteristics of a "retirement" account:
  • Beneficiaries cannot add money to inherited IRAs like IRA owners can to their own accounts.
  • Beneficiaries of inherited IRAs must generally begin to take RMDs (required minimum distributions) in the year after they inherit the account, regardless of how far away they are from retirement. For instance, a grandchild that inherits an IRA at one-year old must begin taking RMDs by the time they are two. It's hard to see how that can be for their retirement.
  • Beneficiaries can take total distributions of their inherited accounts at any time and use the funds for any purpose without a penalty. IRA owners must generally wait until 59 ½ before they can take penalty-free distributions.
Relying largely on these items, the Supreme Court decided that inherited IRAs don't contain "retirement funds" and, as a result, the favorable bankruptcy protection afforded to such funds under the federal bankruptcy code should not be extended to them.

Does this decision apply to all inherited IRAs?
Although the Supreme Court's decision doesn't explicitly state one way or another, its ruling seems to be limited to IRAs inherited by someone other than a spouse. There are a number of special rules for spousal beneficiaries under the tax code, including the ability for a surviving spouse to rollover a decedent's IRA into their own IRA. In fact, during oral arguments, the bankruptcy trustee's attorney even made a point to distinguish Clark's inherited IRA from that of a surviving spouse.

So, while making any assumptions in this area can be dangerous, it would appear, at least for now, that an IRA inherited from one's spouse would maintain its exempt status under the federal bankruptcy laws.

What can you do to protect your funds
The question for many now is, "How can I keep my hard-earned money away from my children's (or other beneficiaries') creditors after I'm gone?"

For some, state law may provide protection. The Supreme Court's decision didn't say that inherited IRAs can't be protected in bankruptcy, but rather, that they are not protected from bankruptcy under the federal bankruptcy statutes. That doesn't, however, preclude states from offering bankruptcy protection — or, for that matter, creditor protection in non-bankruptcy situations — to inherited IRAs under state law.

In fact, during the last three years alone, while the courts have been bouncing back and forth on this issue, no less than seven states have adopted laws expressly exempting inherited IRAs under state bankruptcy statutes. If you're an IRA beneficiary with angry creditors and you're lucky enough to live in one of these states, you may be able to shield your inherited IRAs despite your money woes.

In most states, though — at least for now — inherited IRAs and other retirement accounts aren't afforded any special protections. In such cases, there are certainly a number of different approaches you might consider to protect your hard-earned retirement funds after you're gone. Perhaps the most obvious approach though, especially in situations where bankruptcy or general creditor protection for your beneficiaries is a significant, real concern, is to name a trust as your IRA beneficiary.

If — and this is a big if — a trust is drafted properly, certain requirements are met and the trust contains appropriate spendthrift language, it can help shield the trust assets (like an inherited IRA) from your trust beneficiaries' creditors while still allowing the trust to stretch distributions from the inherited IRA out over the oldest applicable trust beneficiary's life expectancy.

There are a lot of potential downsides to consider when naming a trust as your IRA beneficiary, though, including: Increased tax burden due to the compressed trust tax brackets, ongoing accounting and trustee fees and their sheer complexity. So arbitrarily naming a trust as your IRA beneficiary probably isn't best either. There's little question that a properly drafted trust serving as an IRA beneficiary affords greater creditor and bankruptcy protection for your heirs, but because there are also downsides to using them, whether or not you should do so becomes a complex decision that should take into consideration many factors, including the size of your IRA and how likely it is that your beneficiaries will face creditor issues.

Should you be faced with such a decision at some point in the future, it's probably best to consult with both an attorney with expertise in the IRA area, as well as a tax professional with sufficient IRA and trust accounting knowledge. It may sound silly, but you only get one shot to get things right and protect as much of your wealth as possible for your heirs once you're gone, so plan ahead, do your research and make an informed decision that's right for you, your beneficiaries and your peace of mind.

What do you think of the Supreme Court's decision? Should inherited IRAs be protected in bankruptcy or should they be available to creditors to satisfy outstanding debts? Please comment below or tweet me @IRAGuru4EdSlott to let me know your thoughts.

- By Jeffrey Levine and Jared Trexler

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

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.


ed slott IRA questions
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.

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.


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?

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.


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?

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.

- By Joe Cicchinelli and Jared Trexler

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.

IRA trust beneficiaryYou 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.

- By Beverly DeVeny and Jared Trexler

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.

ed slott IRA beneficiaries1. 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.

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Are 401(k) and IRA Distribution Rules Different In Year I Turn 70 1/2?

Are the rules different for 401(k) and IRA distributions in the year you turn age 70 1/2? We answer that questions and two others in this week's Slott Report Mailbag. 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.


Good Day Ed and Company,
ed slott IRA questions
Send your questions to [email protected]

I have a 401(k). I am 70 years old as of January and they are requiring me to take my full RMD (required minimum distribution) before I am allowed the flexibility to take any other distributions. Is this a restriction to this custodian alone or do all other 401(k) have a similar restriction. I know I have the flexibility I want with an IRA, but I fear the fees are higher with an IRA rather than with my 401(k).

Thank you,


Assuming you are retired from the employer where you have the 401(k) plan, in the year you turn age 70 ½, any distributions you take automatically count towards your RMD first. This is an IRS rule and applies to both plans and IRAs.


I inherited an IRA from my mother almost a year ago. It was worth around $140,000. I took out $30,000 immediately to pay off some debts. So there is about $120,000 in there now because of growth. My husband and I are looking to purchase a franchise. I am wondering if there is a way to use the inherited IRA to purchase this business without a huge tax bill. I have spoken to several IRA financing companies, but they cannot work with an inherited IRA. What are my options?

Maria Ward

If your inherited IRA purchases the franchise and then you or your husband work for that franchise, there’s the risk that a prohibited transaction (PT) will occur. A PT can void the entire inherited IRA and cause a complete taxable distribution of the entire balance. In a recent case, a court ruled that an IRA owner engaged in a PT (self-dealing) when a business owned by his IRA paid him for working there. You should get a legal opinion from an independent professional before investing the inherited IRA.



My mother (age 90) died recently (2013) and according to what I read, the recommended way to re-title the account is John Smith, deceased, IRA for the benefit of Mary Jones.

I asked the banks (2 separate accounts) to do this but they actually did it as follows: “Mary Jones BENE IRA John Smith (deceased)” and “Mary Jones BENE of John Smith”.

Is this the same as the recommendation and if not, do I have any recourse since I did request the former titling in writing as part of the process of documenting her death?

Separately, can these accounts be moved to another trustee or consolidated into a single trustee?

Thank you.

There is more than one way to properly title an inherited IRA. All the titles you mentioned in your question are acceptable. As long as the title includes the name of the decedent, the name of the beneficiary, and uses the social security number of the beneficiary, they are all okay.

Also, accounts inherited from the same decedent can be combined or moved via a trustee-to-trustee transfer.

- By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: Roth Conversions and Recharacterizations Leave This Reader Confused

This week's Slott Report Mailbag looks at IRA beneficiary language and procedures as well as Roth conversions and recharacterizations, a topic we cover heavily in Ed Slott's 2014 Retirement Decisions Guide. 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.


Hi Ed,

IRA and retirement planning questions
Send questions to [email protected]
I need help! My father passed away in February of 2012. He was listed as beneficiary on my sister's IRA. She passed away May of 2012 and did not change the beneficiary. PNC Bank said there are only two choices. The IRA will become part of her Estate, which can be taken out in a lump sum or the Administrator of her Estate can take MRD (minimum required distribution) and the Estate pays the income taxes, which are around 40%. They said there is no option for me, the only heir, to move it to an inherited IRA where I would pay the income taxes at a much lower rate when the MRDs were taken. Does this sound right? Is it just their policy or is this the law? I understand in this case the IRA is subject to pay debt, but there is none. I don't understand why I don't become the beneficiary of the IRA through probate. I hope this makes sense and any knowledge and advice you have on this would be greatly appreciated!

Thank you,
Paula Braham

Assuming your sister’s estate is the default beneficiary under PNC’s IRA document, the only way you can become the IRA beneficiary is if the IRA assets are transferred (or assigned) through her estate to an inherited IRA in your name as beneficiary of her. In some cases, the IRS has allowed a beneficiary of an estate to transfer IRA funds to an inherited IRA in the beneficiary’s name, as beneficiary of the deceased IRA owner. However, because the estate was the original beneficiary, you cannot use your single life expectancy (stretch-IRA) and would have to take the money out over 5 years assuming she died before her required beginning date. Unfortunately though, the IRS has approved these transfers only on a case-by-case basis in Private Letter Rulings (PLRs). The IRS fee for a PLR is $10,000, not including professional fees to draft the ruling. You may want to speak with an attorney who is familiar with this area of the law to see if assigning the IRA assets to you is possible.



Through my employer, I just switched my 401(k) contributions to a Roth, however I have kept the contributions going into the same fund. So, now my 401(k) and Roth 401(k) contributions are mixed. I can track how much of each type I've contributed, but when it comes time to do a rollover (or qualified withdrawal), will it become difficult to figure out how much should be rolled into each type of 401(k) (Roth v. Rollover) given the gains (or losses) resulting from each type of contribution?

If so, should I now start directing the Roth 401(k) contributions to a new fund - and move the Roth 401(k) portion of the original fund to the new fund to keep them separate?

Thanks much,

The 401(k) plan should be tracking the Roth 401(k) funds and their attributable earnings separately, despite the fact that they are invested in the same fund.


I am confused by the rules around the Roth conversion and recharacterization process.

If I want to undo a conversion, I recharacterize the assets back to the traditional IRA…I got that; but to convert those assets again (now at a lower basis), do I have to wait until the next January or can I simply open a new Roth conversion IRA (with a new account number) to convert the assets?

If the new account is needed, can I then use the old account once January comes for the next year’s conversion without any problems?

Your articles are so helpful…thank you very much!


Once you convert and then recharacterize, you cannot reconvert those same funds until the year after the year of the conversion or more than 30 days after the recharacterization, whichever is later. For example: if you converted up to November 30, 2013 and recharacterized in 2014, you have to wait more than 30 days before you reconvert. That is a shorter time period than waiting until the next year (2015). If you converted in March 2013 and recharacterized in November 2013, you can now reconvert because it is now the year after the conversion. The simplest way to think about it is - you can only convert those assets once in a calendar year. You do not need a new Roth IRA for the reconversion. But, if you think you might want to recharacterize again, it is easier if you keep the assets in a separate Roth IRA until the recharacterization time period has lapsed.

- By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: What Can I Do If My Husband Didn't List an IRA Beneficiary?

Come rain, sleet, or in this case, a Nor'easter of snow, we still deliver The Slott Report Mailbag will questions about IRA required minimum distributions (RMDs), beneficiaries when one wasn't listed (hint: the spouse isn't automatically the beneficiary) and the Roth IRA conversion rules. 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.


I will start taking distributions in two years. Does the IRS required distribution eventually take all of your IRA?

Thanks for response in advance.

IRA questions ed slott
Send questions to [email protected]

Generally, no - not for IRA owners. If you live to age 115 or older, the Uniform Lifetime Table (ULT) factor, which is used to calculate your required minimum distribution each year, will be 1.9 years. Because this factor never goes below 1, when you divide it into your prior December 31 IRA balance to figure your RMD, it will always give you an RMD that will be less than your IRA balance. This assumes you never have significant investment losses in your IRA.

For non-spouse designated beneficiaries the rule is different. They find their starting factor on the Single Life Table and then reduce that factor by one each year. Eventually the factor goes to 1 or less and the entire remaining account balance must be withdrawn.


Mr. Slott,

My husband passed suddenly two months after we were married. He had a Traditional IRA. On this account, he had no beneficiary listed. Even though I am his spouse, they will not let me re-title or rollover this account. They told me this account must go to his estate. If I am his widow and the surviving spouse, why must I cash this account and pay taxes? ?

Thank you,

Catherine Callan

A spouse is not automatically the beneficiary of an IRA account. It appears that the default beneficiary language in the IRA document has your husband's estate as the beneficiary. Even though the estate is the beneficiary, that doesn't mean that you have to cash in the IRA and pay taxes all at once. If your husband died before his required beginning date, which is April 1 after the year he was 70 ½, then you have 5 years to take the money out. If he died after his required beginning date, then you can take the money out over his remaining single life expectancy.

Assuming you are the beneficiary of his estate and have complete control over his estate's assets, then you also should speak with a qualified advisor or attorney about the possibility of doing a spousal rollover through the estate to an IRA in your own name.


Even though my wife and I are both retired and don't have any earned income, are we allowed to transfer funds from our traditional IRAs to our Roth IRAs with no restrictions on the amounts we can transfer? My wife is 67 and I am 70 years old.

Yes you can. There is no age limit to do a Roth IRA conversion nor is there any requirement to have earned income or compensation to do a conversion.

- By Joe Cichinelli and Jared Trexler

Slott Report Mailbag: Do IRA Fees Count Towards my RMD?

The first Slott Report Mailbag of 2014 involves several topics we go into detail on at our 2-Day IRA Workshop (one is coming up on January 30-31, 2014 in New Orleans.) Spousal waivers, the 60-day IRA rollover window and required minimum distributions are the topics of the day, and our team of IRA Experts answered each below. 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.


Does my managed account IRA wrap fee count towards my mandatory RMD yearly total?


IRA and retirement planning questions
Send your questions to [email protected]

No. IRA fees, whether they were deducted from your IRA balance or paid by you out-of-pocket, are not considered distributions and thus do not count towards your RMD.


My father designated his two adult daughters as beneficiaries of his IRA with Bank of America. He stopped making contributions to the IRA several years ago. In 2011, he remarried, and then died suddenly in 2013. He did not leave a will. The daughters filed a claim for the IRA with B of A, but the bank refuses to distribute funds to them because the new spouse won't sign a waiver of any interest in the IRA. She has no interest because there were no contributions (community or separate property) to the IRA during the 23-month marriage. A certified copy of the marriage certificate was turned over to the bank proving no contributions were made after the date of the marriage. The Bank still refuses to distribute the funds and the widow will not communicate with the bank (or the daughters). Is there anything we can do, other than file a lawsuit against the bank, to get B of A to follow the law and distribute the funds to the designated beneficiaries?

Any suggestions you may have are very much appreciated. Thank you in advance!


Unless your father lived in a community or marital property state, spousal consent or a spousal waiver is generally not necessary for the daughters to obtain the IRA funds as the named beneficiaries of his IRA under state law. You may want to get a copy of the IRA document to see if there is any language in it that requires a spousal waiver. Also, look at the IRA beneficiary form to make sure his daughters are indeed the named beneficiaries of the IRA.

You also should try escalating your request for payment. Ask to speak to a supervisor or their supervisor, or to speak to someone in the legal department. Ask them to show you, in writing, where it says that you need to have a spousal waiver signed. Keep track of the names and locations of anyone you speak to and keep copies of any written correspondence. Let them know that you are contemplating a lawsuit and that part of that lawsuit will be that they must pay your legal costs.


If I made a withdrawal from my Roth IRA in 2013, and I am under age 59 ½ and the withdrawal consisted of past contributions (not earnings), can I put the money I withdrew back into my Roth IRA before I file my 2013 taxes as if it never happened?

Thank you!

You may do a rollover of those funds if it’s within 60 days of when you received the funds. If it’s after 60 days, then it’s not rollover eligible. If the Roth IRA distribution consisted only of contributions, and no conversions or earnings, then none of it will be taxable or subject to the 10% early distribution penalty. You and IRS will receive a 1099-R from the Roth IRA custodian reporting your distribution. You will need to include that form on your 2013 tax return. Consult with your tax preparer or see the instructions for IRS Form 1040 to determine what you will need to do.

- By Joe Cicchinelli and Jared Trexler

Year-End IRA and Retirement Planning Questions Answered

2014 is almost here, but we wanted to open the Slott Report Mailbag one last time to answer some pressing year-end retirement planning questions, as well as several issues with decisions that will come in the new year. We at Ed Slott and Company want to wish you a Happy New Year and invite you to join us in 2014, as we continue to educated financial professionals and consumers on IRA intricacies as well as tax and retirement planning strategies and updates.
IRA retirement planning questions
Send questions to [email protected]


My wife and I have just one grandchild from one of our two sons (with no current plans for a 2nd). The other son and wife are trying but no luck yet. After our passing, we would like our IRA and Roth IRA to be shared by all grandchildren, likely equally. How can we accomplish this?

You could name your “living grandchildren” as beneficiary at the time of your death but many financial institutions might not accept that vague beneficiary designation without your grandchildren’s specific names. You may need to consider naming a trust for your grandchildren as beneficiary of your IRAs. Minor grandchildren cannot sign the necessary paperwork to open an inherited IRA, cannot manage the investments, and cannot request the required minimum distributions. You should consult with a financial advisor on the best way for this type of asset to pass to a minor.


If an IRA to Roth IRA conversion is done on December 30, 2013 can it be recharacterized on January 30, 2014 to avoid liability on the conversion? Can it legally be converted again in 2014 to avoid MAGI (modified adjusted gross income) limits? If the conversion and recharacterization are done before April 15, 2014, how do I show this maneuver when I file my tax return?

A 2013 conversion can be recharacterized (reversed) up to October 15, 2014. If it’s recharacterized in 2014, that 2013 conversion cannot be reconverted until more than 30 days after the recharacterization. Follow the instructions on IRS Form 1040 and Form 8606 on how to show that on your tax return. You might want to consider having your taxes done by a professional for that tax year.


Hello Ed and thank you for taking the time to read my question. I have been checking out information on the web with regard to tax implications when withdrawing from a Roth IRA and cannot find the exact answer I want. I am over 60.

I opened a Roth IRA recently and will be making periodic conversions, over time, from my Traditional IRA. I understand that after the Roth IRA is opened for at least five years, any capital gains become tax free along with the principle.

Does the five-year starting date begin when I initially open the Roth IRA despite the fact that I will be doing partial conversions for a number of years to follow?

Please advise and thank you again,

In your case, because you’re over age 59 ½, there is no 5 year clock with respect to the 10% early distribution penalty on conversion funds being withdrawn within 5 years. However, for purposes of the earnings (there are no capital gains in an IRA) in the Roth IRA you must wait for more than 5 years before those funds can be withdrawn tax-free. Earnings are withdrawn last; withdrawals will be deemed to be made from your conversions first on a first in, first out basis.


If I have a 401(k) and a traditional IRA at the end of 2013 and then in 2014 roll the 401(k) into a traditional IRA, what happens to the RMD (required minimum distribution) for the 401(k) since it no longer exists? Do I have to take it BEFORE rolling the 401(k) into an IRA?


The 401(k) RMD must be taken before you roll over the remaining 401(k) funds to the IRA.



My sister, Ann, age 66, died and left her IRA to her only two sisters, Mary, 69, and Susan, 71. The accounts were separated on time and each sister is in charge of her own inherited IRA. The older sister, Susan, names her younger sister Mary, age 69, as beneficiary of her own inherited IRA. Susan starts taking her RMDs, but dies at age 73 leaving her inherited IRA to the only remaining sister, Mary, now age 71. Can the surviving sister, Mary, who is beneficiary of this account, retitle the account and continue to take RMDs based on the older sister's age and applicable divisor? If so, how should this inherited IRA be named?

Keep in mind that this only remaining sister would then be taking two RMDs from the original owner's account. One based on her age and applicable divisor and one based on her sister, Susan's age at death and applicable divisor.(i.e., Ann as original owner’s sister Mary as beneficiary or Susan as first beneficiary w/ second sister (Mary) as beneficiary.) I understand why this is so confusing, but really need your advice. Thank you.


When Mary inherits from Susan, Mary is a successor beneficiary. She is inheriting from a beneficiary and not from the IRA account owner. The required distributions cannot be reset to the successor beneficiary’s age. They must continue based on the original beneficiary’s calculation. Example: Susan is age 40 when she takes her first required distribution. She is using a factor of 43.6. Each year that factor is reduced by 1. When Mary inherits from Susan, she continues using that schedule.

- By Joe Cicchinelli and Jared Trexler

Think Twice Before Naming a Trust as an IRA Beneficiary

Many individuals are advised by their attorneys to set up a trust. There are a lot of good reasons to have a trust. But you really have to think twice before naming a trust as the beneficiary of an IRA. Read that sentence again - think twice before naming a trust as the beneficiary of an IRA. When that happens, who is the beneficiary of the IRA? It is the trust.

IRA trust beneficiaryWhy is this important? Let’s say you have three children. They are all responsible adults; they even have jobs and their own homes. You could name them as the equal beneficiaries of your IRA. At your death, they would inherit the IRA and timely split it into three separate inherited IRAs. They would each be able to take required distributions (RMDs) from their own inherited IRA using their own age.

Contrast this with naming a qualifying trust as the beneficiary of the IRA. Your children are the beneficiaries of the trust. You now have only one beneficiary of your IRA - the trust. At your death only one inherited IRA is set up for the trust. When it comes time to take an RMD, it will be calculated on the age of the oldest trust beneficiary - the oldest child - since it is a qualifying trust. The RMD is paid from the inherited IRA to the one beneficiary - the trust. The trustee of the trust will then make distributions to the children in accordance with the terms of the trust. Your children will likely be prevented from setting up their own inherited IRAs. They will not control the investments of the inherited IRA. They cannot take distributions whenever they want. They are not the IRA beneficiaries. The trust is.

Let’s change the example a little. The trust will split into three sub-trusts, one for each child. That should change things, right? Maybe. If the master trust is named as the sole beneficiary, nothing changes. If the sub-trusts are named as the IRA beneficiaries, then each child can use his own life expectancy. Nothing else changes.

Let’s change the example again. The trust says collect all your assets, then distribute them and terminate the trust. You still have to go through all the above steps until the trust terminates. Then, if you are lucky, your IRA custodian will allow the trustee of the trust to have the title on the inherited IRA account for the trust changed to an inherited IRA account for the trust beneficiary. This change in title cannot change how RMDs are calculated. If all trust beneficiaries are using the age of the oldest trust beneficiary, they must continue using that age.

Using a trust as an IRA beneficiary adds a lot of complexity to your estate plan. If you can trust your children, maybe you should name them directly on the IRA beneficiary form instead of naming a trust.

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Does The Once-Per-Year-Rollover-Rule Apply to Distributions From 401(k)s?

This week's Slott Report Mailbag gets into the Roth IRA 5-year rules - a tricky topic we talk about often in this space - as well as the once-per-year-rollover-rule and disclaimer planning. These topics showcase the depth of IRA distribution and retirement planning and the intricacies, detail and potential danger involved in this area. 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.

IRA, retirement planning, tax questions
Send questions to [email protected]

I opened a Roth IRA in 2001. I took all the money out in 2013 when I turned age 59 1/2. Although the account was still open a few months longer, there is no money in it.

Now, 6 months later, I want to do a Roth conversion with an investment of $30,000 that is currently in my self-directed IRA at another institution. The upside potential for this $30,000 investment in the next 5 years is huge so it seems to make sense that it would be better off in a Roth.

Can I open a new Roth IRA at this different institution and make my Roth conversion without having to wait 5 years?

Are there any guidelines for valuing this investment (a private offering memorandum) at the time of the conversion or is it valued as just the monies that you have invested?

Thank you so much!
Robin Heninger

You can open a Roth IRA at any institution at any time. The conversion is taxed on the fair market value of the assets when they’re distributed from the IRA. Because you are over age 59 ½, there is no 10% penalty if you withdraw the conversion funds within 5 years. Also, because you opened your first Roth IRA in 2001 (i.e., more than 5 years ago) and you’re over age 59 ½, all distributions are now considered qualified and thus tax-free. IRS has been very clear that IRA assets must be valued at fair market value both for Roth conversions and for RMD (required minimum distribution) purposes. You should be sure that the value placed on your investment is one that would pass IRS scrutiny.


Dear Slott Mailbag -

Taxpayer was a partner in a law firm. A few years back he left the firm, selling back his partnership interest, and was employed by a new law firm as a W-2 employee.

In 2013, he rolled over a portion of the 401(k) plan from his original firm to a new IRA account. The 401(k) plan had two "components" - a Profit Sharing component and a Partners’ component. The rollover came from the Profit Sharing component.

He now, still in 2013, wants to roll over more money from both components of the 401(k) plan to the same new IRA account to which the first 401(k) withdrawal was transferred. He will then purchase a real estate investment in this new IRA account.

I am aware of the one-year restrictions on IRA-to-IRA accounts - but the above is from a 401(k) plan to an IRA plan. Is there any reason that the Taxpayer cannot do what he now wants to do - rollover more money now from the two components of the 401(k) plan to the IRA account created from the first rollover?

Thank you!

The one-rollover-per-year rule does not apply to distributions from 401(k)s. He can rollover more money now to the same IRA or to a new IRA.



My mom recently passed away and she had an IRA on which myself, my brother and my sister are named as equal beneficiaries. For reasons I won't get in to, my sister is considering disclaiming her portion. If she does so, would her portion then be split equally between my brother and me? Thanks for taking my question.

Michael Willemsen

If she files a qualified disclaimer of her portion of that IRA, the result is as if she died before you and your brother. Typically, her disclaimed portion would be shared equally between the two remaining beneficiaries. You should seek advice from an attorney as a disclaimer is a legal document. You should also check with the IRA custodian to determine who would inherit the disclaimed share before any disclaimer is actually done.

-By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: Going Back to the IRA Basics

It's fitting and all. School is in session or about to begin for many, so this week's Slott Report Mailbag provides the syllabus for IRAs 101, answering consumer questions on some of the IRA nuts-and-bolts you and your financial team must know to properly open, manage and distribute from an 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.

Send questions to [email protected]
1. Can I contribute to an IRA or Roth IRA on behalf of my spouse who does not work or who makes less than the contribution limits?

Yes, you can contribute on behalf of a non-working spouse. The contribution rules are the same for the non-working spouse as they are for the working spouse. You must have earned income in order to make a contribution. The safe harbor definition of earned income is W-2 income. You can contribute the amount of your earned income or the contribution limit, whichever is less. Any taxpayer with earned income can make an IRA contribution with the following two exceptions. If you are age 70 ½ or older during the year, you cannot make a traditional IRA contribution. If your income exceeds certain limits you will not be able to make a Roth IRA contribution. The income limits will increase each year for inflation. See IRS Publication 590 for the current contribution and income limits (you could also visit www.IRAhelp.com/2013). If you are age 50 or over you are eligible to make an additional catch-up contribution in the amount of $1,000.

2. Do I have to take distributions from my traditional IRA?

YES. An IRA, SEP or SIMPLE owner must begin taking distributions in the year they turn age 70 ½. It does not matter if you are still working or if you do not want to touch the money, you still must take a required distribution. Your IRA custodian is required to notify IRS that you have to take a distribution, but they are not required to tell IRS how much you should withdraw. The custodian is required to tell you how much you should withdraw or they must offer to do the calculation for you. You will get that letter from your IRA custodian in January each year.

A non-spouse IRA beneficiary who is named on the beneficiary form (not one who inherits through the estate) must generally begin taking distributions in the year after the IRA owner’s death although some beneficiaries may have only 5 years to distribute the entire IRA. A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) does not have to start taking distributions until the IRA owner would have been age 70 ½. However, an IRA custodian can limit the distribution options for a beneficiary. You should check the IRA agreement for each account you inherit to see what your distribution options are for that account. A non-person beneficiary (estate, charity, etc.) and a trust beneficiary have special distribution rules. See IRS Publication 590 or the IRA account agreement form for more information on the distribution rules for beneficiaries.

Any required distribution that is not taken is subject to a 50% penalty of the amount not taken and is reported on IRS Form 5498 for the year the distribution was missed.

3. Can I name a trust as the beneficiary of my IRA or Roth IRA?

Yes, you can name a trust as the beneficiary of your IRA or Roth IRA. BUT, do not do this unless you understand all of the ramifications of having a trust instead of an individual inheriting the IRA. Always consult with an IRA expert advisor before taking this step. NEVER, NEVER, NEVER move your IRA assets into the trust or re-title your IRA into the name of the trust. Both of those actions are taxable events and you will owe income tax on the entire balance in your IRA, and you will no longer have an IRA!! The trust should simply be named as the beneficiary on the beneficiary form.

4. I just inherited an IRA or Roth IRA from my spouse. What do I do now?

Under the tax code you have three options, but your IRA custodian may limit these options. You will need to check with the custodian to see what your options are.

1. You can leave the IRA where it is and remain a beneficiary. This is generally not recommended. When you start taking distributions, they will be accelerated and your beneficiaries may not be able to stretch distributions over their lives when they inherit from you. However, it could be beneficial for a younger spouse who will need funds from the IRA to live on before attaining age 59 ½. Distributions from the inherited IRA will not be subject to the 10% early distribution penalty. Required distributions will begin in the year the account owner (not you) would have attained age 70 ½ or in the year after death if the owner was already 70 ½.

2. You can leave the IRA where it is and have it retitled in your own name and social security number. Some IRA custodians may not allow you to do this, but it is a simple way for you to get the IRA in your own name. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already age 70 ½.

3. You can move the funds to an IRA in your own name. This can be either a new account or an IRA that you already had in your name. If you are under the age of 59 ½, any funds you take out of an account you own will be subject to the 10% early distribution penalty. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already 70 ½.

Whatever option you use, always be sure to name your own beneficiaries on the account you have inherited. Any required distributions that are missed will be subject to the 50% penalty and are reported on IRS Form 5498 for the year the distribution was missed.

- By Joe Cicchinelli and Jared Trexler

Will Your Will be Challenged by a Beneficiary? Creating an "In Terrorem" Clause in Your Estate Plan

Creating an estate plan can be a very challenging process. For starters, it involves serious contemplation of on'’s death and the resulting aftermath, which can, in and of itself, be an uneasy topic of discussion. In some cases, however, the process can be particularly emotional and technically challenging. Oftentimes this occurs when someone chooses, for one reason or another, to treat children or other similar beneficiaries unequally, perhaps even disinheriting one or more of them.
estate plan will beneficiary
An unfortunate side effect of such action, however, is that it may increase the likelihood of your will being challenged. That could lead to any number of problems, including unnecessary legal costs, probate assets not being available to your intended beneficiaries in a timely manner and, perhaps most importantly, your final wishes going unfulfilled. So if you think your final wishes might ruffle some feathers, so to speak, what can you do?

Well, one thing you can do is to try and structure your will in such a way that it encourages people not to challenge it. There are a number of ways to do this, but one possible solution is to include what’s called a “in terrorem,” or “no contest” clause. The term “in terrorem” comes from the fact that the inclusion of such a provision in your will is supposed to terrify individuals from contesting it. While the exact wording of this clause will vary from state to state, and even from attorney to attorney, it tends to look something like this:

Anyone who is named as a beneficiary of this will and who contests this will shall receive $1, regardless of the outcome.

So how well can including a clause like this in your will actually prevent someone from challenging it? It depends on a number of factors.

For one thing, you have to make it worth a beneficiary’s while not to challenge. That often means not disinheriting them completely, even if that’s what you’d really like to do. Think about it… if you were completely disinherited under someone’s will, how much would that stop you from challenging it? If you did, what’s the worst that could happen? You could end up with nothing, which is right where you started - not counting any legal fees you might incur during the process, of course.

Similarly, if you have an estate of, say, $5,000,000 and you have two children and leave one child $4,995,000 and leave the other $5,000, that $5,000 might not be enough to prevent that child from contesting the will. In their mind, it might be worth risking the $5,000 for a shot at $2,500,000, or whatever they think they might be entitled to in the will. So step one in implementing an effective "in terrorem" clause is to leave a beneficiary enough money so that they think twice - check that, three times - about challenging your will. How much that should be, exactly, depends, among other things, on the total value of your estate, as well as how likely it is that a particular beneficiary would challenge your will.

The effectiveness of this provision varies from state to state. For instance, in some states, the "in terrorem" clause may work pretty much as it sounds and punish a would-be contester regardless of the outcome of their efforts. Other states, however, will refuse to strictly enforce such clauses as a matter of law, if there is “probable cause” for a person to bring the contest. Even in such cases, however, it’s possible that after reading such a clause, a beneficiary will think twice before taking any action.

So if you are really, really worried about someone contesting your will, you may want to choose where you live (and where you die, for that matter) carefully. Many retirees move to new locations for one reason or another. Common reasons include tax benefits, cost of living, Medicaid eligibility rules and family reasons. If the contestability of your will is hot button issue for you, maybe this is an item to add to your list.

- By Jeff Levine and Jared Trexler

IRAs and Wills Don't Mix

IRAs and willsA 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.

-By Joe Cicchinelli and Jared Trexler