[h=1]Naming Your IRA Beneficiary – More Complicated Than You Might Expect[/h]The decision concerning whom you wish to designate as the beneficiary of your traditional IRA is critically important. This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70-1/2, who will get what remains in the account after your death, and how that IRA balance can be paid out. What's more, a periodic review of whom you've named as IRA beneficiaries is vital to ensure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs and in your personal, financial, and family situation.
The issue of naming a trust as the beneficiary of an IRA comes up regularly. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax related reason, such as controlling a beneficiary’s access to money; thus, naming a trust rather than an individual(s) as the beneficiary of an IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies.
Distributions from traditional IRAs are always taxable whether paid to you or, upon your death, paid to your beneficiaries. Once you reach age 70-1/2, you are required to begin taking distributions from your IRA. If your spouse is your beneficiary, the spouse can delay distributions until the spouse reaches age 70-1/2 if he or she is under the age of 70-1/2 when inheriting the IRA. The rules are tougher for non-spousal beneficiaries, who generally must begin taking distributions based upon a complicated set of rules.
Since IRA distributions are taxable to beneficiaries, beneficiaries usually wish to spread the taxation over a number of years. However, the tax code limits the number of years based on whether the decedent had or had not begun his or her age 70-1/2 required minimum distributions at the time of their death. If the decedent had begun taking his or her age 70-1/2 minimum required distributions the non-spousal beneficiaries must begin taking distributions in the first calendar year following the decedent’s death. Using the Single Life Table provided by the IRS, the post-death distribution period used to determine the RMD is the longer of: (1) the remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each subsequent year after the date of death or (2) the remaining life expectancy of the IRA beneficiary using the beneficiaries' attained age in the year of death and subtracting one for each subsequent year after the date of death. So as long as the beneficiary is younger than the decedent at the date of death, the IRA distributions can be stretched out over the beneficiary’s expected life.
If the decedent had not begun taking his or her age 70-1/2 minimum required distributions, the non-spousal beneficiaries must begin taking distributions in the first calendar year following the decedent’s death over the lifetime of the beneficiary using the Single Life Table. Where there are multiple beneficiaries, the life expectancy of the oldest beneficiary must be used.
In either case, whether the decedent had begun taking the minimum required distributions or not, the beneficiaries have the option to take the entire amount, in any manner desired, within the first five years after the decedent’s death.
To ensure that your IRA will pass to your chosen beneficiary or beneficiaries, be certain that the beneficiary form on file with the custodian of your IRA reflects your current wishes. These forms allow you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will dictate whether the IRA will go first to a living person or to your estate.
This is a simplified overview of the issues related to naming a beneficiary and the impact on post-death distributions. There are some less frequently encountered rules not covered here, and it may be appropriate to consult with this office regarding your particular circumstances before naming beneficiaries.
[h=1]Planning Your RMD and IRA Distributions For 2012[/h]We spend most of our lives saving for retirement by putting funds away in tax-advantaged ways. But many of us forget about planning the withdrawals so that they are tax-advantaged as well.
Although there are exceptions, retirement funds generally cannot be withdrawn until we are age 59.5. If taken out sooner, there is a 10% penalty that applies in most cases. In addition, there may be a state penalty.
A large number of taxpayers do not take distributions until they are forced to do so at age 70.5, not realizing they might benefit tax-wise by taking money out sooner. For example, if you are in a low or zero tax-bracket this year, you can take a certain amount out with no or minimal tax cost. That is where planning your distributions can save a significant amount of tax dollars.
Even if you are under 59.5, if your income for the year is below the taxable income limit, you can withdraw an amount that brings you up just short of the taxable income threshold and only pay the penalty.
If you receive Social Security benefits, keep in mind that Social Security income is tax-free for lower-income retirees but becomes taxable as income increases. IRA distributions can sometimes be planned in order to minimize the taxability of the Social Security income.
Once you reach age 70.5, you must start taking the required minimum distribution (RMD) from your Traditional IRA and other qualified pension plans. But you can still withdraw more than the required amount. If your income is low, it may be appropriate to take more than the minimum to save taxes in the future. Unfortunately, many people simply take the IRS-specified minimum amount without considering the tax-planning aspects of the distribution.
The penalty for not taking the RMD after reaching age 70.5 is an additional tax of 50% of the amount that should have been taken that year, based upon the IRS rules. The good news is that the IRS will generally, upon request, waive the penalty, provided that you show a corrective distribution was made in the subsequent year. So if you missed an RMD for the prior year, you should contact this office right away with regard to taking corrective action.
The RMD is determined by taking the IRA balance on December 31 of the prior year and dividing that total by your remaining life expectancy from the IRS table. If you have more than one IRA, figure the RMD for each one and then combine them to get the total required distribution for the year. (An owner of a Roth IRA is not required to take distributions at any age.)
For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual are treated as one, but the actual minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. If you have other qualified plans besides Traditional IRA accounts, the RMD for those must be figured separately for each type and withdrawn from those plans and cannot be combined with the distributions from IRAs or other qualified plans.
A taxpayer who fails to take a distribution in the year he or she reaches age 70.5 can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70.5 is attained and one for the current year.
If an IRA owner dies after reaching age 70.5, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.
As you can see, there is more to the required minimum distribution than meets the eye, and there are some significant planning opportunities. Give this office a call if you have questions or would like to schedule a planning appointment.
Frank’s Tax and Business Service
120 York Rd
Kings Mountain, NC 28086-3151
(704) 739-4039 Fax: (704) 739-3934
e-mail: [email protected]
Web Site: File Your Return Online
Franklin Katz, ATP, PA, PB,
Providing Professional Accounting, Bookkeeping,
Payroll and Income Tax Preparation Services
*Circular 230 Disclaimer: To ensure compliance with Treasury Regulations governing written tax advice, please be advised that any tax advice included in this communication, including attachments, is not intended, and cannot be used, for the purpose of (i) avoiding any federal tax penalty or (ii) promoting, marketing, or recommending any transaction or matter to another person.
Confidentially Notice: This email message is CONFIDENTIAL and is intended for the addressee only. If you are not the intended addressee of this message, you may not use, copy or disclose to anyone the contents of this message or any information contained herein or any attachment thereof. If you have received this message in error and are not the intended addressee, please advise the sender by reply email and delete this message immediately.
*The IRS does not endorse any particular individual tax preparer. For more information
on tax return preparers go to IRS.gov
.
The issue of naming a trust as the beneficiary of an IRA comes up regularly. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax related reason, such as controlling a beneficiary’s access to money; thus, naming a trust rather than an individual(s) as the beneficiary of an IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies.
Distributions from traditional IRAs are always taxable whether paid to you or, upon your death, paid to your beneficiaries. Once you reach age 70-1/2, you are required to begin taking distributions from your IRA. If your spouse is your beneficiary, the spouse can delay distributions until the spouse reaches age 70-1/2 if he or she is under the age of 70-1/2 when inheriting the IRA. The rules are tougher for non-spousal beneficiaries, who generally must begin taking distributions based upon a complicated set of rules.
Since IRA distributions are taxable to beneficiaries, beneficiaries usually wish to spread the taxation over a number of years. However, the tax code limits the number of years based on whether the decedent had or had not begun his or her age 70-1/2 required minimum distributions at the time of their death. If the decedent had begun taking his or her age 70-1/2 minimum required distributions the non-spousal beneficiaries must begin taking distributions in the first calendar year following the decedent’s death. Using the Single Life Table provided by the IRS, the post-death distribution period used to determine the RMD is the longer of: (1) the remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each subsequent year after the date of death or (2) the remaining life expectancy of the IRA beneficiary using the beneficiaries' attained age in the year of death and subtracting one for each subsequent year after the date of death. So as long as the beneficiary is younger than the decedent at the date of death, the IRA distributions can be stretched out over the beneficiary’s expected life.
If the decedent had not begun taking his or her age 70-1/2 minimum required distributions, the non-spousal beneficiaries must begin taking distributions in the first calendar year following the decedent’s death over the lifetime of the beneficiary using the Single Life Table. Where there are multiple beneficiaries, the life expectancy of the oldest beneficiary must be used.
In either case, whether the decedent had begun taking the minimum required distributions or not, the beneficiaries have the option to take the entire amount, in any manner desired, within the first five years after the decedent’s death.
To ensure that your IRA will pass to your chosen beneficiary or beneficiaries, be certain that the beneficiary form on file with the custodian of your IRA reflects your current wishes. These forms allow you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will dictate whether the IRA will go first to a living person or to your estate.
This is a simplified overview of the issues related to naming a beneficiary and the impact on post-death distributions. There are some less frequently encountered rules not covered here, and it may be appropriate to consult with this office regarding your particular circumstances before naming beneficiaries.
[h=1]Planning Your RMD and IRA Distributions For 2012[/h]We spend most of our lives saving for retirement by putting funds away in tax-advantaged ways. But many of us forget about planning the withdrawals so that they are tax-advantaged as well.
Although there are exceptions, retirement funds generally cannot be withdrawn until we are age 59.5. If taken out sooner, there is a 10% penalty that applies in most cases. In addition, there may be a state penalty.
A large number of taxpayers do not take distributions until they are forced to do so at age 70.5, not realizing they might benefit tax-wise by taking money out sooner. For example, if you are in a low or zero tax-bracket this year, you can take a certain amount out with no or minimal tax cost. That is where planning your distributions can save a significant amount of tax dollars.
Even if you are under 59.5, if your income for the year is below the taxable income limit, you can withdraw an amount that brings you up just short of the taxable income threshold and only pay the penalty.
If you receive Social Security benefits, keep in mind that Social Security income is tax-free for lower-income retirees but becomes taxable as income increases. IRA distributions can sometimes be planned in order to minimize the taxability of the Social Security income.
Once you reach age 70.5, you must start taking the required minimum distribution (RMD) from your Traditional IRA and other qualified pension plans. But you can still withdraw more than the required amount. If your income is low, it may be appropriate to take more than the minimum to save taxes in the future. Unfortunately, many people simply take the IRS-specified minimum amount without considering the tax-planning aspects of the distribution.
The penalty for not taking the RMD after reaching age 70.5 is an additional tax of 50% of the amount that should have been taken that year, based upon the IRS rules. The good news is that the IRS will generally, upon request, waive the penalty, provided that you show a corrective distribution was made in the subsequent year. So if you missed an RMD for the prior year, you should contact this office right away with regard to taking corrective action.
The RMD is determined by taking the IRA balance on December 31 of the prior year and dividing that total by your remaining life expectancy from the IRS table. If you have more than one IRA, figure the RMD for each one and then combine them to get the total required distribution for the year. (An owner of a Roth IRA is not required to take distributions at any age.)
For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual are treated as one, but the actual minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. If you have other qualified plans besides Traditional IRA accounts, the RMD for those must be figured separately for each type and withdrawn from those plans and cannot be combined with the distributions from IRAs or other qualified plans.
A taxpayer who fails to take a distribution in the year he or she reaches age 70.5 can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70.5 is attained and one for the current year.
If an IRA owner dies after reaching age 70.5, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.
As you can see, there is more to the required minimum distribution than meets the eye, and there are some significant planning opportunities. Give this office a call if you have questions or would like to schedule a planning appointment.
Frank’s Tax and Business Service
120 York Rd
Kings Mountain, NC 28086-3151
(704) 739-4039 Fax: (704) 739-3934
e-mail: [email protected]
Web Site: File Your Return Online
Franklin Katz, ATP, PA, PB,
Providing Professional Accounting, Bookkeeping,
Payroll and Income Tax Preparation Services
*Circular 230 Disclaimer: To ensure compliance with Treasury Regulations governing written tax advice, please be advised that any tax advice included in this communication, including attachments, is not intended, and cannot be used, for the purpose of (i) avoiding any federal tax penalty or (ii) promoting, marketing, or recommending any transaction or matter to another person.
Confidentially Notice: This email message is CONFIDENTIAL and is intended for the addressee only. If you are not the intended addressee of this message, you may not use, copy or disclose to anyone the contents of this message or any information contained herein or any attachment thereof. If you have received this message in error and are not the intended addressee, please advise the sender by reply email and delete this message immediately.
*The IRS does not endorse any particular individual tax preparer. For more information
on tax return preparers go to IRS.gov
.