Fun Stuff to Know and Tell — Individual Retirement Accounts
USEFUL, WHO SAID ANYTHING ABOUT USEFUL? GOOD THINGS TO KNOW!
SPOUSE DIED: TRAGIC, UNAVOIDABLE TOO MUCH TAX ON IRA: TRAGIC, UNNECESSARY
YOUR SPOUSE DIED, LEAVING YOU AS BENEFICIARY OF A TRADITIONAL OR ROTH INDIVIDUAL RETIREMENT ACCOUNT.
WHAT CAN YOU DO? WHAT CAN YOU DO?
BASIC: All IRAs are held and managed by an “IRA custodian.” The IRS gives 3 options to surviving spouses. But your IRA custodian’s policies and procedures determine which of the 3 possible options are available to you.
LEAVE IT ALONE
Don’t Upset the Apple Cart #1. Keep the IRA Custodian in Place. Be treated as beneficiary, not spouse. Probably a bad idea. But not always…
Why You Might Be Beneficiary: Are you less than 59 ½ years old AND you need the IRA money right away? Avoid the 10% penalty tax on early withdrawals by taking required minimum distributions (RMDs) over your life expectancy starting now. Or you can wait and take RMDs when your spouse would have become 72 years old. If spouse was already 72, you must start the RMDs now. Payments are accelerated, but hey, you need the money now!
Downsides: When you die, your beneficiaries will not get the 10-year stretch-out of payments, but will be limited to whatever period of time was remaining for you. Also, the Supreme Court has held that IRA assets held for a beneficiary are not “retirement plan assets.” This means that if you were to be sued, the “inherited IRA” assets would be available to judgment creditors! That means you could lose the inherited IRA assets. But who then gets to pay the tax? Right! You. But you have no money because that bad ole judgment creditor took it all. Right again! Bad news.
More Bad News: A beneficiary- inherited Roth IRA must pay out RMDs, just like a Traditional IRA.
Bottom Line: Consider carefully. No “obvious” or “always” solutions.
ROLL TO YOU, BUT LEAVE WITH CUSTODIAN
Don’t Upset the Apple Cart #2. What if the current IRA Custodian is a whiz? Great service! Stunning Investment Performance! Returns Phone Calls! You like them, they like you. Don’t screw up a good thing. Roll it over. Let the IRA continue to dance with the folks what brung it. If they let you (but they may not!).
If the IRA Custodian allows, the account rolls over to your name. Your social security number, too. Your personal information substitutes for that of your deceased spouse. Age, children.
The 10% penalty if you take the dough before age 59 ½ applies. Traditional IRA: RMDs at 72. Roth IRA: No RMDs at all! And you have full “retirement plan” asset protection. Your beneficiaries may use the full 10-year stretch-out.
What if the IRA Custodian goes sour on you? Well, it is your very own IRA. So, you can change to another IRA Custodian as you wish.
ROLL OVER, ROLL OVER, SO THEY ALL ROLLED OVER…
Perfectly Clear Fresh Start! Create a new IRA account. With a new IRA Custodian. Roll the deceased spouse’s funds to this new account. As with Option #2, it’s just like a brand-new account. And who doesn’t like brand-new?
Modified Limited Hang-out. On the other hand… You are happy with your existing IRA Custodian. You do not want to be responsible for cutting down hundreds of trees for double the paperwork. A simple life and a happy one is your motto.
Stick with whom you know and direct the roll-over funds to your existing IRA. All existing rules apply. You simply increase the amount of money in your well-established Individual Retirement Account.
BY THE WAY…
CONTINUING CONSIDERATIONS OF CONCERN
1. The rules apply to Traditional IRAs and Roth IRAs. But you cannot use the roll-over alone to convert a Traditional IRA to a Roth IRA. Traditional to Traditional. Roth to Roth.
2. Revisit your beneficiary designations. Should you name individuals? Perhaps a Tax Advantaged Legacy Trust would be the best choice? Your LifePlanTM attorney can help!
3. Bad News: Choose Option 1 for an inherited Roth IRA, and you will have to take Required Minimum Distributions, just as if it were a Traditional IRA. Good News: Options 2 and
3. As a spouse beneficiary, you do not have to take any RMDs.
4. Mind the deadlines! Remember that failure to take a timely RMD distribution will result in a 50% penalty tax. Ouch!
5. Major changes to Traditional and Roth IRAs laws, rules, and regulations have occurred over the last few years. Many more can be expected. It’s not easy, so watch this space!
NON-SPOUSE LOVED ONE DIED: TRAGIC, UNAVOIDABLE
TOO MUCH TAX ON IRA: STILL TRAGIC, UNNECESSARY
YOUR MOM, DAD, BROTHER, SISTER, SAINTED AUNT, CRUSTY UNCLE, BEST BUDDY DIED, LEAVING YOU AS BENEFICIARY OF A TRADITIONAL OR ROTH
INDIVIDUAL RETIREMENT ACCOUNT.
WHAT CAN YOU DO? WHAT CAN YOU DO?
BASIC: All IRAs are held and managed by an “IRA custodian.” The IRA custodian’s policies and procedures determine which options are available to you.
No Stretch-out for You! The 2019 SECURE Act (so-called IRA “reform”) applies when the loved one died in 2020 or later. Previous law allowed IRA beneficiaries to stretch out their inherited IRA payments over their life expectancy. Government, however, likes to get its money sooner rather than later. (Why is it their money?!) Rather than wait to get bits and pieces over your lifetime, they want it now. So, new rule: Inherited IRA must be exhausted, fully withdrawn, emptied within 10 years.
Exceptions. If the IRS decides that you are: minor child of the owner; 10 years or less younger than the owner; disabled, or; chronically ill, special rules will apply and your mileage may vary.
AIN’T IT GREAT TO FIND OUT HOW THINGS REALLY WORK?
UNCOVER THE ELEPHANT!
Seems like we are surrounded by elephants… Each one cleverly disguised by the global investment industry, the legal profession, government, and others. But you can’t hide an elephant forever, no matter how hard you try. When you want to find out what is really going on… come on down!
Isn’t long-term care the biggest elephant in the herd? How can you get the straight story? Learn accurate information. Find out what you truly need to know.
Like most families you are busy. Lots of stuff going on. So, we make it easy. Get the information, insight, inspiration you need. To live your life. Make smart decisions. Cut through the fog. It is your turn. For you. For your loved ones.