The Battle Over Retirement Accounts: Spousal Waivers and IRAs

You are married and have an IRA. You know you need to name a beneficiary for those funds. But what if you do not want to name your spouse as the beneficiary? Are you required to name him or her? Under federal law, and IRAs are governed mostly by federal law, you are not required to name your spouse as your IRA beneficiary. You can name anyone you want as the beneficiary. They don’t even have to be a relative.

State law will have some impact here, though. If you live in a community property state, you will most likely need to have your spouse sign a waiver before you can name a non-spouse beneficiary for your IRA funds. In some states, you can “disinherit” your spouse by naming someone else on the beneficiary form, but the spouse could have the last laugh. Some states allow a disinherited spouse to make a right of election against the estate and the spouse would then end up with some of your assets. He or she could then laugh all the way to the bank.

In most employer plans, if you are married and want to name someone other than your spouse as the beneficiary of your plan benefits, you must have your spouse sign a waiver.

 Be careful who signs the waiver. It must be a spouse. Documents signed by a fiancé, such as a pre-nuptial agreement, do not count. Once a spouse signs a waiver, update the beneficiary form. You should do both steps to ensure that your assets go to the beneficiaries that you select.

 Divorce decrees also don’t count. A spouse can waive rights to retirement benefits in a divorce decree, but as long as a beneficiary form naming the spouse remains in place, that spouse – now the ex-spouse – will, in most cases, end up with the retirement benefits. Always update beneficiary forms after a divorce.

 Beneficiary form reviews should be a key component of your financial plan, whether you are your own planner or you have a professional doing this for you. You can see how something that seems so simple can quickly become complicated.

My Plan Custodian Will Only Issue a Check, Now What?

Checks Issued Could Still Qualify as a Trustee-to-Trustee Transfer…

If you want to do a direct transfer (trustee‐to‐trustee transfer) but your current IRA custodian or plan administrator will only issue a check, all hope is not lost. If a check is made payable to you, that transaction will trigger the 60‐day rollover rules. In addition, if the check is not from your IRA but is issued by a qualified employer plan such as your 401(k) for example, the issuance of the check usually triggers a mandatory 20% withholding.

How Can You Fix This Problem?

If the plan will not do a trustee-to-trustee transfer (sometimes called a direct rollover) to an IRA or eligible retirement plan and you are told they must issue you a check, there is a work around. The check may still qualify as a trustee‐to‐trustee transfer if the check is made out directly to the receiving IRA instead of you, the IRA owner. Regulation Section 1.401(a)(31)‐1, Q& A‐4 tells you exactly how to make the check out so that the transaction qualifies as a direct rollover.

Source: www.irs.gov

Reviewing Estate Plans

Articles in popular publications routinely warn readers about the very thing we have been telling our clients for years: review your estate planning documents at least once per year!

BASIC ESTATE PLANNING DOCUMENTS INCLUDE:

• Wills
  
• Trusts
• Beneficiary Forms
• (Insurance, Retirement Plans, Accounts)
• Powers of Attorney
• (Durable, Health Care Directives)
• Letters of Instruction
• (For Your Trustee, Executor and/or Heirs)
• Anything Else You Have to Provide For and Protect Your Loved Ones!

Failure to review estate planning documents can spell disaster for your beneficiaries yet this failure is surprisingly common. One example is a client who recently discovered that the trust her husband set up contains provisions that conflict with their most recent financial plan and distribution goals.

Unfortunately, he passed away and she is now stuck with the flawed trust terms. The trust was drafted about 25 years ago but they never reviewed the trust terms despite the fact that several life changing events occurred and their planning strategies changed. Sadly, this oversight resulted in irreparable and unintended results for their beneficiaries.

Even though you cannot predict what will happen and when it will happen, you can adjust your estate plan as needed. Make sure you consult with your personal Wealth Preservation Consultant, accountant, attorney or other professional advisor when any life changing event occurs or new legislation affects your tax and estate planning. Always ensure your assets flow the way you want them to and in the most tax efficient manner.

RMD Basics for IRA Owners

If you own or are the beneficiary of an IRA, 401(k) or other retirement plan, make sure you don’t make an RMD (required minimum distribution) error. Failure to take at least the RMD amount each year results in a 50% penalty imposed by the IRS! Keep in mind that beneficiaries who inherit IRAs have different rules so you will need to contact your retirement distribution expert for more information about rules specific to IRA beneficiaries.

• IRA owners must take their very first RMD no later than April 1st of the year following the year they turn 70½. So if you turn 70½ in 2016, your required beginning date is April 1, 2017. However, if you choose to delay your very first RMD until 2017, you will need to take two RMDs in 2017 – your first RMD and your regular RMD for 2017.
• You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday.
• Except for your very first RMD discussed above, all subsequent RMDs must be taken no later than December 31st each year.
• RMDs are generally calculated by dividing the adjusted market value of your IRAs as of December 31st of the preceding year by the distribution period that corresponds with your age in the Uniform Lifetime Table (IRS Publication 590-B).
• You must calculate the RMD amount for each of your IRAs separately. However, if you have more than one IRA (must be the same type), you don’t have to take a separate RMD for each…you can aggregate and withdraw the entire amount from just one IRA of the same type or withdraw a portion from each IRA to satisfy your RMD.
• Failure to take a timely RMD results in a 50% penalty on the undistributed amount. This rule applies to both IRA owners and IRA beneficiaries.
• IRA owners can always withdraw more than the minimum distribution amount… just be prepared to pay the income taxes.

Special Needs Trusts: 10 Common Mistakes

Conversations about tax and estate planning often lead to conversations about trusts. Special Needs Trusts in particular can be very complex and difficult to understand.

The Following are 10 Common Special Needs Trust Mistakes:

1. Confusing Public Benefit Programs
2. Failure to Keep Current with Trust Administration Laws
3. Confusing First Party and Third Party Special Needs Trusts
4. Misunderstanding the “Sole Benefit” Rule
5. There is No System for Requesting Distributions
6. Trustee Refuses to Make Distributions
7. Failure to Distribute for Food or Shelter
8. Distributing Cash Directly to the Beneficiary or Reimbursing the Beneficiary
9. Failure to Maintain Excellent Records
10. Trust Termination and Disbursement Priority

Eligibility for public benefits may be adversely impacted if a Special Needs Trust isn’t handled properly. Trustees must be sure to follow strict rules when administering a Special Needs Trust to ensure that the beneficiary’s need-based public benefits are not compromised.

Do you have a Special Needs Trust set up for a loved one or do you plan to create this type of trust in the near future? If so, it is imperative that you consult a qualified attorney who specializes in estate and tax planning to ensure that your trust doesn’t inadvertently cause a problem for the Special Needs Trust beneficiary.

Spousal Beneficiary Options for IRAs

Why is it important to distinguish between a spouse beneficiary and a non-spouse beneficiary of an IRA? It’s important because non-spouse beneficiaries do not have the same distribution options as spousal beneficiaries. A few key differences are discussed below.

Take RMDs as a Beneficiary

Spousal IRA beneficiaries are not required to treat IRAs they inherit from a deceased spouse as their own. They may be significantly younger and need to withdraw IRA assets to live on but they also want to avoid an IRS early distribution penalty. Assume Mary passes away at age 58 and her husband Ben is the beneficiary of her IRA. The IRA contains significant assets but Ben is only 35 years old and he needs the IRA money to live on. If he elects to treat the inherited IRA as his own, he will not only owe income taxes on any distributions, he will also owe a 10% early distribution penalty because he is under 59½ and no other exception applies. In this case, Ben is likely better off taking required minimum distributions (RMDs) as a regular beneficiary. Should his situation improve a few years down the road, Ben can later elect to treat the IRA as his own and roll it into his own IRA, basically “turning off” the RMD requirement until he reaches age 70½. However, a spousal rollover is a one-time irreversible election so Ben needs to consult with his distribution expert and make an informed decision.

Retitling – Treat As Your Own

A spouse beneficiary may elect to treat the deceased spouse’s IRA as his or her own by simply having the IRA retitled with the surviving spouse’s name. Only spousal beneficiaries have this option available to them.

Rollovers

A spousal rollover permits the surviving spouse to rollover the inherited IRA into his or her own existing IRA. To illustrate, assume Mary is the beneficiary of her husband Ben’s IRA. Ben passes away and Mary elects to rollover Ben’s IRA into her own because she is only 62 years old and she wants to delay her required minimum distributions from Ben’s IRA until she reaches age70½. Mary may now name her young grandchildren as the beneficiaries, creating the opportunity for a multi-generational IRA strategy that allows them to enjoy tax-deferred distributions over their individual life expectancies. No other type of IRA beneficiary has this option. *IMPORTANT: a spousal rollover is a one-time, irreversible election.

60-Day Rule

A spousal IRA beneficiary has the advantage of the 60-day rollover rule. Using Ben and Mary as an example, assume Mary passed away and Ben withdrew the IRA assets. Ben has 60-days to complete a rollover and deposit the funds into his own IRA. In this case, to avoid rollover errors, Ben may simply choose to retitle Mary’s IRA as his own rather than engage in a rollover transaction.

A 60-day rollover option is never available to non-spouse IRA beneficiaries. Once a distribution is made to the non-spouse, it is irrevocable and fully taxable.

401(k) Withdrawals During Retirement

QUESTION: WHAT ARE YOUR OPTIONS WITH RESPECT TO YOUR EMPLOYER SPONSORED 401(K) PLAN WHEN YOU RETIRE?

Answer: It varies depending upon the options that are made available to you in your plan document - your 401(k) plan sponsor makes the rules!

TRUSTEE-TO-TRUSTEE TRANSFER

If you don’t want to leave your assets with the current plan sponsor, you may want to consider a trustee-to trustee transfer (direct rollover) to an IRA. This is a non-taxable transaction.

LUMP-SUM WITHDRAWAL

You will owe ordinary income taxes if you elect to take a lump-sum distribution. If you later decide to rollover this distribution, you are required to redeposit the funds into another qualified retirement account, such as an IRA, within 60 days of the distribution.*

AUTOMATIC PERIODIC WITHDRAWALS

Some plans will allow you to request regular monthly, quarterly or annual withdrawals. Automatic withdrawals come in handy for RMDs – it eliminates the risk of missing the RMD deadline each year.

WITHDRAWALS ANYTIME

Your plan may allow you to make as many withdrawals as you wish. Be careful with this type of option – besides any ordinary income taxes you may owe on distributions, you could be charged a high fee every time you take a withdrawal.

Be careful when it comes to fees and your 401(k). If you decide to leave your 401(k) assets with the plan sponsor, look into the fee schedule. How much will you be charged for each transaction? What about 401(k) management fees, do you believe they are too high?

Before deciding to leave your 401(k) assets where they are or choosing to transfer the assets to an IRA when you retire, it is critical to fully assess the pros and cons. Your local America’s Tax Solutions professional is a retirement distribution specialist and can help you evaluate your situation including information about safe, alternative options.

*A 20% mandatory withholding applies to lump-sum distributions from a 401(K). If you later decide to rollover that distribution within 60 days, you will not get the withholding back until tax time so you will have to add funds from other sources equal to the amount withheld.

What is Net Unrealized Appreciation?

QUESTION: CAN I AVOID TAXATION ON THE APPRECIATION OF MY COMPANY STOCK?

NET UNREALIZED APPRECIATION (NUA)

Money you make on the appreciation of an asset over time is called capital gains. Those gains are measured by the price the stock is sold for, minus the original purchase price of the stock when acquired. If your 401(k) plan holds stock from your employer and that stock appreciates over time, its fair market value will be considerably higher than its cost basis when you retire. The difference in the value of the stock from the time of purchase to the time of withdrawal is called Net Unrealized Appreciation.

A SPECIAL TAX BREAK

Special tax rules regarding NUA allow you to withdraw company stock from your retirement plan, retain ownership of the stock, and pay ordinary income tax on the acquisition price rather than its fair market value at the time of distribution.

WHAT HAPPENS WHEN I SELL THOSE SHARES?

Should you choose to sell the shares, you pay the long-term capital gains tax rate in effect on the appreciation and the applicable capital gains rate on any additional appreciation since distribution.

OUR ATS EXPERTS CAN EXPLAIN OTHER STIPULATIONS IN THE CODE INVOLVING NUA:

• To qualify for the break, you must take the entire pension plan account balance in a lump-sum distribution over the course of one tax year.
• Dividends paid on the stock are not tax-deferred.
• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your America’s Tax Solutions retirement distribution specialist can describe for you how this strategy works, and how it may affect you and your heirs.

See-Through Trusts

What is a “see-through” trust? Sometimes referred to as a “look-through” trust, it is essentially a trust drafted in a way that permits an IRA custodian to distribute RMDs from an inherited IRA based on the oldest trust beneficiary’s life expectancy. This type of trust is important to understand if you plan to name a trust as the beneficiary of your IRA or other qualified plan.

Under IRS rules, a trust is not a person and, therefore, cannot be a designated beneficiary. Why is this an important rule to understand? It’s important because many people (including some estate planning attorneys) do not understand that naming a trust as the beneficiary of your IRA eliminates the opportunity for individual trust beneficiaries to use a Multi-Generational IRA strategy.

A trust will qualify as “see-through” if all of the following elements are met:

1. The trust is valid under state law.

2. The trust is irrevocable or becomes irrevocable upon the death of the owner.

3. The trust beneficiaries are individuals who are identifiable.

4. All trust documents have been provided to the IRA custodian by October 31st of the year following the year of the owner’s death including:

a. A list of all beneficiaries including contingent and remaindermen.

b. Trust certification and certification that the beneficiary list is correct.

c. If the trust is amended, corrected certifications that change any information previously certified.

d. An agreement to provide the custodian a copy of the trust instrument upon demand.

Even if your trust qualifies as see-through under IRS rules, the trust beneficiaries may be treated as designated for IRA distribution purposes. But, at best, the trust beneficiaries cannot use their individual life expectancies to receive required minimum distributions and they are stuck using the life expectancy of the oldest trust beneficiary. IRS Publication 590 clearly states that “The separate account rules cannot be used by beneficiaries of a trust.”

Roth vs. Traditional IRA: Features and Distinctions

The primary difference between a Roth and Traditional IRA is that the funds in a traditional IRA grow tax-deferred, while the funds in a Roth IRA grow income tax-free. Contributions you make to a traditional IRA are taxed upon withdrawal. Roth IRA funds are taxable at the time of contribution, thereafter, Roth interest and capital gains are distributed income tax-free.

One popular rationale for maintaining a traditional IRA is that retired people may be in a lower tax bracket and would therefore pay less tax on withdrawals of IRA funds going out than they would tax on Roth contributions going in. Because of pension income, Social Security payments, and/or investment income, some Americans will find themselves in an equal or higher bracket after they leave their jobs. Also, present income tax rates are at an historical low—only the 1930s saw a lower individual tax rate than we’re experiencing today.

Traditional IRA account holders must take Required Minimum Distributions (RMDs) each year, beginning at age 70½. Roth IRA owners are not subject to RMDs. You can continue making contributions to a Roth IRA after age 70½ if you have taxable compensation and fall within the MAGI limits. Traditional IRA contributions are tax deductible and grow tax-deferred. Roth Contributions are not deductible but the earnings grow tax-free.

Is a Roth strategy right for you? Everyone’s situation is different and Roth rules are complicated so it is easy to make an error. That’s why it is very important that you discuss opening a Roth IRA or converting to a Roth IRA with your qualified tax professional and/or retirement distribution specialist.

IRA Summit: May 11-13, San Diego

Register HERE Today!