Inherited Traditional IRAs for Non-Spouse Beneficiaries.

Transcription

1 Rev Inherited Traditional IRAs for Non-Spouse Beneficiaries. The Webinar will be starting shortly. 8:45am CST or 1:00pm CST Copyright 2015 Collin W. Fritz & Associates, Ltd. The Pension Specialists All rights reserved. No part of this presentation may be reproduced in any form and by any means without prior written permission from Collin W. Fritz & Associates, Ltd.

2 Just a Reminder: This is copyrighted material. No audio or video recording is permitted without prior written permission from Collin W. Fritz & Associates, Ltd. Thank you for your compliance. 2

3 The Audio Portion of this presentation is available either by phone or by using the speakers and microphone on your PC. The phone number is provided to you in the confirmation from CWF and again at the time you join the meeting. You will need the access code that was ed to you in the confirmation from CWF. The confirmation code is 9 digits in length e.g You will also need the Audio Pin # which is shown to you at the time you join this meeting. If you need assistance re-connecting please call CWF at Copyright 2011 Collin W. Fritz & Associates, Ltd The Pension Specialists 3 3

4 Overview Once the IRA accountholder dies, his or her IRA becomes an inherited IRA. This happens as a matter of a law. The IRA funds will now be used to benefit the beneficiary(ies) rather than the IRA accountholder. This webinar covers administering a traditional inherited IRA. Similar concepts will apply to inherited Roth IRAs which are addressed in another webinar. 4

5 Overview (continued): Once the IRA accountholder dies, the individual or individuals who were designated as primary beneficiaries acquire a legal interest in the IRA. The terms used to describe this situation are an inherited IRA or a beneficiary IRA. In effect, the beneficiary or beneficiaries become new clients of the financial institution serving as the IRA custodian/trustee. The beneficiary will be required to take required distributions from the inherited IRA (i.e. the decedent s IRA). This presentation discusses the rules for these required distributions and other aspects of administering the inherited IRA. CIP rules apply with respect to the beneficiary once the IRA Accountholder has died. 5

6 Overview The concept of the law is once the accountholder has died, then the funds or assets within the IRA must be distributed (or begin to be distributed) to the beneficiary, so, ultimately, the IRA will be closed, and the tax preferences associated with such IRA type will end. Since the payout period will normally be based on the life expectancy of the first beneficiary, it may well be in the range of 10 to 70 years. Continued deferral of an IRA s earnings within a traditional IRA or tax-free income within an inherited Roth IRA for such a long time are very valuable tax rights. Obama Administration Proposal 5 years??? Future law changes - grandfathering 6

7 Inherited IRAs for Non-Spouse Distributions Accountholder Before Age 59½ Age 59½ to 70½ and older 7 Contributions Deductible Non-Deductible Transfer No Rollover or Annual Custodial or Trust Account Earnings within Account are not Taxed Beneficiaries Original Subsequent In general, the beneficiary will include the distribution in income and pay tax but will not owe the 10% tax. 7

8 Decedent s IRA Inherited IRA for a Non-Spouse Beneficiary Non-Reportable transfer. Any distribution will be a reason code 4 if a traditional IRA and a Q or T if a Roth IRA. 8 8

9 9 IRA Rollovers and Direct Rollovers Eligible Retirement Plan to Roth IRA Conversion. Since 2008 other retirement accounts can be converted directly to a Roth IRA. This includes inheriting beneficiary of ERP. Inherited QRP Direct Rollover Non-Spouse Beneficiary Inherited Traditional IRA Inherited QRP (Direct) Rollover/Conversion Non-Spouse Beneficiary Inherited Roth IRA Inherited Roth QRP (Direct) Rollover Inherited Roth IRA

10 10 CWF # 56I CWF # 56RI

11 Special Administration 1. Special titling for Form 5498 purposes. As a result of the above special rules, an IRA beneficiary must be able to identify the source of each IRA he or she inherited for purposes of figuring the taxation of a distribution from an IRA. For example, Jane Doe as beneficiary of John Doe s traditional IRA. * 2. No rollover rights 3. No Additional Contributions 4. Special Transfer considerations 5. Special RMD requirements 11

12 Special Administration Background: An inherited IRA (or beneficiary IRA) must be administered differently than the IRAs for living accountholders. There are numerous reasons. First, a beneficiary IRA is not allowed to accept additional contributions, and a non-spouse beneficiary is not eligible to roll over a distribution from a beneficiary IRA. Second, the required distribution rules always apply to an inherited IRA. Third, the beneficiary steps into the deceased taxpayer s shoes and assumes the tax rights which the deceased accountholder had in the IRA. With one exception, the IRA distribution will be included in the income of the beneficiary (and not the deceased accountholder), if applicable, and the beneficiary will have to pay the taxes on such distribution at his or her marginal tax rate, if applicable. As a result of the above special rules, an IRA beneficiary must be able to identify the source of each IRA he or she inherited for purposes of figuring the taxation of a distribution from an IRA. For example, Jane Doe as beneficiary of John Doe s traditional IRA. 12

13 Non-Spouse Beneficiary Cannot Elect to treat the Decedent s IRA as own or roll over a distribution from an inherited IRA to another inherited IRA or a regular IRA A non-spouse beneficiary must be very sure that he or she wishes to be paid funds from an inherited IRA, because a rollover is never permissible, including a rollover back into the financial institution which just issued a distribution check. Likely lawsuit if your bank makes a distribution which was not requested. 13

14 14 Inherited IRAs for Non-Spouse Beneficiaries

15 15 Traditional IRA Owner has Died Before Decedent s Required Beginning Date On or After Decedent s Required Beginning Date Spouse Beneficiary Who is Sole Beneficiary Non-Spouse or Spouse Who is not Sole Beneficiary Qualified Trust Estate, Non- Qualified Trust, Church or Charity Spouse Beneficiary Who is Sole Beneficiary Non-Spouse or Spouse Who is not Sole Beneficiary Qualified Trust Estate, Non- Qualified Trust, Church or Charity Treat as Own Standard Life distribution rule Standard Life distribution rule using the oldest trust beneficiary 5-Year Rule is mandatory Treat as Own Standard Life distribution rule Standard Life distribution rule using the oldest trust beneficiary Special Life rule using the decedent s age as of the year he or she died. Special Life Distribution Rule 5-Year Rule 5-Year Rule Special Life Distribution Rule 5-Year Rule

16 16 Discussion 1. Any surviving spouse may take a distribution regardless if the life distribution rule or the 5-year rule applies and roll it over as long as the standard rollover rules are met. 2. Distribution, if any, due for year of death. a. If the decedent dies before his or her 70½ year, then there is no required distribution for the beneficiary to take for the year of death. b. If the decedent died during the year he or she attained or would have attained age 70½ or the following year, but before his or her required beginning date and the beneficiary is a spouse beneficiary, then the RMD for such year must be distributed to the surviving spouse beneficiary to the extent not distributed to the decedent prior to his or her death. c. If the decedent died on or after his or her required beginning date, then his or her RMD for such year must be distributed to the beneficiary to the extent not distributed to the decedent prior to his or her death.

17 General Rule # 1 - Annual RMD is made to a Beneficiary Over His or Her Life Expectancy Unless 5 Year Rule Would Apply and Be Elected. General Rule # 2 Beneficiary Must Take RMD or AN Amount larger than the RMD or the 50% tax is owed. 17

18 Establishing the Inherited IRA for a Beneficiary Created as a matter of law Copy of Decedent s last IRA Plan Agreement New Inherited IRA Plan Agreement - Recommended 18

19 Overview Traditional IRA Beneficiary CWF Inherited IRA Plan Agreement & Disclosure Statement Forms: 40-TI Custodial 41-TI Trust 42 -TI Custodial Self-Directed 19

20 General Procedures Once the IRA custodian/trustee knows of the death of an accountholder, we suggest the following procedure: Identify who is the primary beneficiary or who are the primary beneficiaries. Set up an inherited IRA file for each beneficiary. You will want to put a copy of the deceased accountholder s IRA plan agreement and beneficiary designation in this file along with the other documents discussed herein. Send a letter to each named beneficiary. The letter should inform the beneficiary that you will need to be furnished a certified death certificate (or a similar legal document) as evidence of the accountholder s death. The letter should also inform the beneficiary that certain elections will need to be made as to how and when his or her share is to be paid. A Form #204 or similar form should be enclosed. 20

21 General Procedures (continued): Retain a copy of the death certificate in the file.. Retain a copy of the elections and the instruction for a distribution schedule. Determine if some beneficiaries will not be beneficiaries for RMD purposes. Set up procedures to annually monitor these distributions for correctness as to amount and as to timeliness. Document the distribution(s) so that you are preparing the Form 1099-R correctly. Make sure that there is compliance with the withholding rules. Allow each beneficiary to designate his or her own beneficiary(ies) 21

22 Understanding the Policies and Procedures To Pay Out to a Beneficiary As Set Forth in the IRA Plan Agreement The IRA custodian/trustees must understand what its IRA plan agreement states are the policies and procedures applying to required distributions. Set forth below is what CWF s IRA plan agreement states. 1.7 Special Distribution Rules to Ensure Compliance with Required Minimum Distribution Rules by Beneficiaries and Special Provisions for Inherited IRAs. You agree to inform any person who is your beneficiary that he or she is your beneficiary and he or she must inform us of your death. We have the right to require that your beneficiary(ies) furnish us with a certified copy of your death certificate or other documentation as we feel appropriate to verify your death. 22

23 Understanding the Policies and Procedures To Pay Out to a Beneficiary As Set Forth in the IRA Plan Agreement After your death, there are rules which mandate that your IRA funds be distributed to your beneficiary(ies) on or before certain time deadlines. The time deadlines which apply will depend upon whether you died before or on/after your required beginning date and which available option your beneficiary elects. These deadlines are explained in the Disclosure Statement portion of this IRA book. Upon your death, your IRA will be converted into one or more inherited IRAs. The number of inherited IRAs to be created depend upon the number of your primary beneficiaries alive as of the date of your death. There will be an inherited IRA created for each beneficiary. The following rules will govern such inherited IRAs. These rules are in addition to the other rules of this agreement and will govern if there is a conflict. 23

24 Understanding the Policies and Procedures To Pay Out to a Beneficiary As Set Forth in the IRA Plan Agreement You agree that we have the right to establish an inherited IRA account for each beneficiary on our data processing system even before a beneficiary instructs us how he or she will take the withdrawals. We will have the authority to move the funds from your IRA to one of more new inherited IRA accounts. We will have the right, if necessary, because of data processing or administrative requirements to surrender the savings and time deposits which comprised your account and establish new ones for the inherited IRAs. We will transfer an inherited IRA to another IRA custodian or trustee, but only if the requesting beneficiary and the receiving IRA custodian/trustee will furnish us with a special transfer of inherited IRA administrative form so it clearly acknowledged that it is an inherited IRA which is being transferred. Inherited IRAs are not eligible to be rolled over unless the beneficiary is a spouse. He or She need not be the sole beneficiary to receive a distribution from the deceased spouse s IRA. Each beneficiary will be required to instruct us in writing as to how he or she will withdraw funds from his or her inherited IRA so that the required minimum distributions rules will be satisfied. 24

25 Understanding the Policies and Procedures To Pay Out to a Beneficiary As Set Forth in the IRA Plan Agreement A Spouse beneficiary will be deemed to have elected the life-distribution rules unless he or she expressly elects the five-year rule on or before December 31 of the year following the year of your death. A non-spouse beneficiary will also be deemed to have elected the life-distribution rules unless he or she expressly elects the five-year rule on or before December 31 of the year following your death. We have forms available which can be used by your beneficiary to instruct us which option he or she elects and to establish a distribution schedule. Alternatively, the beneficiary may elect to use the alternative certification method. The beneficiary must furnish us a written notice of his or her intent to use the alternative certification method. We will furnish the beneficiary a form which can be used to make this election, upon his or her request. We shall have the authority but not the duty to distribute any required minimum distribution to your beneficiary(ies). Any beneficiary shall be solely responsible to make sure that the required minimum distributions take place on a timely basis. 25

26 Set up the Inherited IRA for Each Inheriting Beneficiary An inherited IRA will be titled, John Doe as the IRA beneficiary of Jane Doe. You will want to put a copy of the decedent s IRA plan agreement and the beneficiary designation into this file. If a deceased accountholder has more than one beneficiary, then there will need to be an inherited IRA set up for each beneficiary. Each beneficiary will individually have to comply with the RMD rules. You may also want the inheriting beneficiary to sign a new inherited IRA plan agreement. This is certainly necessary if the funds are being directly rolled over by a non-spouse beneficiary from a 401(k) plan or similar plan to an inherited IRA. 26

27 Establishing Inherited IRAs/Inherited Plan Agreements CWF has created IRA plan agreements specifically for inheriting beneficiaries. As you know, the rules for beneficiaries differ considerably from those of the original accountholder. A financial institution normally handles a beneficiary situation by merely placing the original plan agreement, or a copy of it, in the beneficiary s file. In an amending situation, it is confusing as to how to amend the plan agreement. Normally amending would still be geared toward only the original accountholder. CWF believes it would simplify things for the financial institution, and the rules would be more clearly understood by the beneficiaries, if the plan agreement detailed the rules as they apply to beneficiaries. 27

28 Establishing Inherited IRAs/Inherited Plan Agreements An inherited IRA plan agreement highlights important beneficiary issues, such as the ability of a beneficiary to, in turn, designate their own beneficiary(ies), the various distribution options and required beginning dates, and the deadline to change from a 5- year rule to the life-distribution rule. These are important issues of which beneficiaries must be made aware to enable them to make informed decisions concerning their inherited account. These issues are not thoroughly explained in the plan agreement which the original accountholder would have signed. We at CWF believe this is a valuable product to aid your financial institution in providing excellent customer service by helping your staff and accountholders understand the special rules which apply to beneficiaries. There are inherited traditional IRAs and inherited Roth IRAs. Sample Inherited IRA Application (See next page) 28

29 Inherited IRAs for Non-Spouse Beneficiaries CWF 40TI Inherited IRA Custodial Account Application Form 5305-A 29

30 Designation of a Beneficiary(ies) by the Inheriting Beneficiary May an inheriting IRA Beneficiary designate a beneficiary or beneficiaries of his or her share? Yes, the 1987 RMD rules generally prevented a beneficiary from designating a beneficiary; the 2002 rules allow such designation. You will want to check to see that your IRA plan agreement has been revised to authorize this. For example, CWF s Form 40-T at section 1.6 provides: Naming Beneficiaries and Methods of Payment. You may name one of more beneficiaries to receive your IRA assets after your death. We require that you use our beneficiary form to designate your beneficiary or beneficiaries and that you sign this form and file it with us during your lifetime. You are deemed to have furnished us with your beneficiary designation if you furnished such a form to an entity with respect to which we are considered to be a successor custodian and we have such designation in our files. You may change your beneficiaries at any time, and the consent of a beneficiary is not required unless you reside in a state with community or marital property laws. When you sign a new beneficiary form, you revoke all prior beneficiary designations. If you don t name a beneficiary, or none of the name beneficiaries are alive on the date of your death, your IRA assets will be paid to your estate. Researching state law. 30

31 Designation of a Beneficiary(ies) by the Inheriting Beneficiary As the beneficial owner of the IRA assets, you can instruct how and when these assets will be paid to the beneficiaries. If you don t instruct, your beneficiaries will have the right to choose how and when the assets will be paid. Any method of payment must satisfy the provisions of Article IV and other governing law. After your death, each primary beneficiary who acquires an interest in your IRA shall have the right to designate his or her own beneficiary(ies) with respect to his or her share. The procedures for designating a beneficiary(ies) which apply to you as the accountholder shall also to your beneficiary. When a beneficiary signs a new or revised beneficiary designation form, your beneficiary revokes all of his or her prior beneficiary designations. If the beneficiary doesn t designate his other beneficiary(ies), or if a designated beneficiary is not alive when the beneficiary dies, then the remaining IRA assets will be paid to such beneficiary s estate. Any method of payment must satisfy the provisions of Article IV and other governing law. 31

32 Inherited IRAs for Non-Spouse Beneficiaries CWF s Form 204 Beneficiary Instruction Form: Put a Beneficiary on Notice He or She is Subject to the RMD Rules and Obtain Written Instructions 32

33 Inherited IRAs for Non-Spouse Beneficiaries CWF s Form # 204 Beneficiary Instruction Form: Put a Beneficiary on Notice He or She is Subject to the RMD Rules and Obtain Written Instructions 33

34 Inherited IRAs for Non-Spouse Beneficiaries CWF s Form # 57 Distribution Form: Put a Beneficiary on Notice He or She is Subject to the RMD Rules and Obtain Written Instructions CWF57 34

35 IRS Procedures Form 5498 (box 11) - Not Required RMD Notices - Not Required RMD Calculations - Not Required IRA Plan Agreement - Required Tax Court in Bobrow Vs. IRS Commissioner Taxpayers rely on IRS Guidance at their own peril. 35

36 Beneficiary Instruction Form: Put a Beneficiary on Notice He or She is Subject to the RMD Rules and Obtain Written Instructions An excellent way to put a beneficiary on notice of the tax rules and the distribution options available is to furnish a beneficiary with a Beneficiary Election of Instruction Form. An IRA custodian may want to use a copy of CWF s Form # 204 or similar form. CWF s Form # 204 is reproduced on the following pages. This form will also be used by the beneficiary to instruct how he or she will comply with the RMD rules. It should be emphasized to the beneficiary that he or she may well wish to consult with their legal and/or financial advisor before completing the form. 36

37 Beneficiary Instruction Form: Put a Beneficiary on Notice He or She is Subject to the RMD Rules and Obtain Written Instructions It is important for the IRA beneficiary to clearly document his or her election, if applicable, and instructions. CWF Form # 204 (Beneficiary s Distribution Notice and Certificates Form and Payment Instructions) can be used for this purpose. Even if the custodian s/trustee s first knowledge of the IRA accountholder s death is the beneficiary requesting the entire balance of the inherited IRA, it is a good idea to have the beneficiary complete a special form. The special distribution instruction will indicate to them that there are more options than a lump sum distribution. 37

38 RMD Calculations - What Rules Apply For the Year the IRA Accountholder Dies? - If the IRA accountholder dies prior to his or her required beginning date. - Prior to 70½ year. No RMD applies for year of death. - If the year of death is the 70½ year, IRS guidance is conflicting. Regulation vs. Publication If the IRA accountholder dies on or after his or her required beginning date - The RMD for the year of death is determined using the Uniform Lifetime Table. 38

39 What Rules Apply For the Year the IRA Accountholder Dies? Death on or after required beginning date RMD for year of death must be distributed to the beneficiary(ies) to the extent not paid to the decedent by December 31 of such year. If the entire RMD has been paid, then there is no remaining RMD for the year of death needing to be distributed. If the entire RMD had not been paid to the decedent prior to his or her death, then a beneficiary must be paid his or her share of the remaining RMD by December 31 of that year. The non-spouse beneficiary will need to be paid his or her proportionate share of the RMD by December 31, or the 50% tax will apply unless the IRS would waive. 39

40 General Rule RMD calculated using the divisor based on the beneficiary 40

41 Determining Before or After RBD Dates of IRA Accountholder s Birth, Death, and RBD When was the deceased IRA accountholder born? When did the deceased IRA accountholder die? Jan 1 Dec 31 Mar 31 Apr 1 Age 70½ Required Beginning Date Dies Before the RBD Dies On or After the RBD 41

42 Determine Which Death Situation Applies Situation # 1: If the beneficiary is a living person other than the spouse, or the spouse is not the sole beneficiary, and the IRA accountholder dies before the required beginning date, then the beneficiary has two options: Life-Distribution Rule Under this option, the distribution is based on the beneficiary s life expectancy, using one-year reduction. This is the option which automatically applies unless the beneficiary elects the five-year payout. Five-year Payout All funds must be distributed by December 31 or the year that contains the fifth anniversary of the death. As much or as little as the beneficiary wants can be removed each year, as long as the entire IRA balance is distributed by the deadline. 42

43 What is the 5-Year Rule? The IRA beneficiary must take sufficient distributions to close the inherited IRA by December 31 of the fifth year containing the Anniversary of the accountholder s death. There is no requirement to take out any specific amount in any year. In actuality, the beneficiary is allowed six calendar years to take his or her RMD s. Year of Death Schedule # 1 Schedule # 2 Schedule # 3 Schedule # 4 Schedule # % 0% 0% 100% 0% % 0% 0% 0% 50% % 0% 0% 0% 0% % 33.3% 0% 0% 0% % 33.3% 0% 0% 50% Remainder % Remainder 33.3% Remainder 100% 0% 0% The inherited IRA must have a zero balance by 12/31/2017 if the accountholder died in

44 How does the Waiver of 2009 RMD s Impact the 5-Year Rule? The IRS has issued guidance instructing that the year 2009 is to be ignored when applying the 5-year rule. The effect of this ruling is that an IRA beneficiary is given an additional year to close the IRA. Applies only for deaths before Example: IRA Accountholder dies 6/15/2007. Non-Spouse beneficiary elects the Five-Year Rule. The inherited IRA must have zero balance by 12/31/2013. No minimum in any one year. (Changed to 6 years due to 2009 waiver of RMDs) Year of Death Waived/Not Counted

45 Example: IRA Accountholder dies Non-Spouse beneficiary elects the Five-Year Rule. The inherited IRA must have a zero balance by No minimum in any one year. Year of Death Waived Deadline to Close 12/31/

46 Five-Year Rule Death Occurs in 2009 or later Example: IRA Accountholder dies 6/15/2009. Non-Spouse beneficiary elects the Five-Year Rule. The inherited IRA must have zero balance by 12/31/2014. No minimum in any one year. (2009 RMD waiver has no effect on 5-year rule) Year of Death Deadline to Close 12/31/

47 The Basic Required Distribution Calculation Yearly Beneficiary RMD = FMV as of preceding year Divisor (Life Expectancy of Beneficiary) Divisor: In general, based on age of the beneficiary, determined as of the year following the accountholder s date of death. Single Life Table. 47

48 Single Life Table (Used only by Beneficiaries) Age of Beneficiary Distribution Period (in years) Age of Beneficiary Distribution Period (in years) Age of Beneficiary Distribution Period (in years) 48

49 Single Life Table (Used only by Beneficiaries) Age of Beneficiary Distribution Period (in years) Age of Beneficiary Distribution Period (in years) Age of Beneficiary Distribution Period (in years) 49

50 The Basic Required Distribution Calculation Yearly Beneficiary RMD = FMV as of preceding year Divisor (Life Expectancy of Beneficiary) Divisor: In general, based on age of the beneficiary, determined as of the year following the accountholder s date of death. Single Life Table. 50

51 Determining the Period/LE Factor (for situation # 1) Example: The IRA Accountholder dies on at the age of 65, before her RBD. Jane Doe is the only primary beneficiary. She is age 40 in 2013 and will be age 41 in The initial factor comes from the single life table and then subsequent factors are determined by subtracting 1.0 for each following year. Beneficiary Factor Year of Death N/A This same schedule is used for subsequent beneficiary(ies) once the original beneficiary dies. 51

52 Determining the Period/LE Factor (for situation # 2) Example: The IRA Accountholder dies on at the age of 75, after her RBD. Jane Doe is the only primary beneficiary. She is age 40 in 2013 and will be age 41 in Beneficiary Factor Year of Death N/A

53 John Doe dies in His beneficiary is his daughter, Betsy. She is age 40 in 2013 and 41 in The balance in the Inherited IRA as of 12/31/2013 is $28,560. Example #1 assumes a 2% interest/earnings rate. Example #2 assumes a 6% interest/earnings rate. Example at 2% Example #1 Year of Death Subsequent Year Divisor FMV of Preceding Year 2% Interest RMD 2013 N/A $28,000 $560 N/A $28,560 $571 $ $28,462 $569 $ $28,348 $567 $ $28,218 $564 $ $28,071 $561 $725 This same schedule is used for subsequent beneficiary(ies) once the original beneficiary dies. This schedule will exist for 42 years at its maximum. It obviously can be closed prior to

54 Example at 6% Year of Death Subsequent Year Divisor FMV of Preceding Year 6% Interest 2011 N/A $28,000 $1680 RMD $29,680 $1781 $ $30,766 $1846 $ $31,874 $1912 $ $33,003 $1980 $ $34,152 $2049 $882 Note Inherited IRA balances increase as long as interest or other earnings being added exceed the RMD. 54

55 Situation # 1 Life Distribution Rule for Before RBD Situation Rita Marx is age 53 in She has designated her daughter, Barb Smith age 24 as her sole beneficiary. She dies on 11/8/2013. Remember that any beneficiary including a sole spouse beneficiary, is deemed to have elected the life-distribution rule, unless he or she expressly elects the five-year rule. The starting date for the life-distribution rule will be 12/31/2014, since Rita died during Barb is entitled to withdraw the RMD amount, or any amount greater than the RMD, including a lump-sum distribution. For 2014, the RMD amount will be based on Barb s single life expectancy. An initial distribution factor will be determined for 2014 and then reduced by one for each subsequent year. Since she will be 25 in 2014, the factor is Rita Marx Dies Factor Age FMV 2% Interest RMD 2014 Age of Beneficiary $30,000 $600 $ $30,025 $602 $ $30,161 $603 $ $30,227 $605 $548 Continues - 55

56 Situation # 1 Life Distribution Rule for Before RBD Situation LE Factor Determination with Multiple Beneficiaries Under the pre-2002 RMD rules, when an IRA accountholder died having named multiple beneficiaries, the RMD calculation for each beneficiary was based on the age of the oldest beneficiary. Under the post-2001 RMD rules, when an IRA accountholder dies having named multiple beneficiaries, the RMD calculation for each based may be based on the age of each applicable beneficiary as long as the separate accounting rules are met. Example: Mary Thoms designated her daughter, Kim (Age 50) and her son Mark (age 43) as her primary beneficiaries, each to receive 50%. Mary died in 2013 at age 69. Separate inherited IRAs are set up for Kim and Mark in the same year as Mary died. The initial LE factor for Kim is 33.3 since she is age 51 in The initial LE factor for Mark is 39.8 since he is age 44 in

57 What are the Separate Accounting Rules? 1. The inherited IRA must be divided into separate accounts and the beneficiaries with respect to one separate account must differ from the beneficiaries for the other separate accounts. Setting up separate inherited IRAs meet this requirement. 2. The separate accounts must be established by December 31 of the year following the IRA accountholder s death 3. The separate RMD calculation starts the later of: (1) date of the accountholder s death or (2) the year following the calendar year the separate accounts were established. 4. The separate accounting must allocate all post-death investment gains and losses for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent basis among the separate accounts for the different beneficiaries. The separate accounting must also allocate any post-death distribution to the separate account of the beneficiary receiving that distribution. Sooner the separate inherited IRA accounts are established the better. CWF documents authorize setting up separate inherited IRA accounts. 57

58 Illustration of Separate Beneficiary Accounting Rules Laura Boyer, age 86, died on 11/4/2012. She had been paid her RMD for 2012 prior to her death. She had designated her four children as her IRA beneficiaries Anna (12/9/1947); Maria (10/9/1952); David 12/29/1955): and Miquel (10/4/1961). Each received a 25% share. The IRA had a FMV balance of $32,400 as of 12/31/2011. Separate inherited IRA accounts were set up for the four beneficiaries on March 16, What required minimum distributions must be made for 2012, 2013, 2014, etc.? Laura died after her required beginning date. There will need to be four(4) required distributions made to the four beneficiaries in 2013, and subsequent years, until the share of each has been completely distributed. The standard RMD formula is: 12/31/xx FMV divided by a distribution period. When there are multiple beneficiaries, the general rule is that the oldest beneficiary is used to determine the distribution period. The Single Life Table is used to calculate the distribution period of all inherited IRA situations. 58

59 Illustration of Separate Beneficiary Accounting Rules Anna, Maria, David and Miquel will each need to be paid their share of the 2013 required distribution. Anna is the oldest beneficiary. Her age is 65 in The Single Life Table shows that the distribution period for a person age 65 is 21 years. Each has an RMD amount of $ calculated as follows: $32,400 / 21.0 / 4 = $ Why isn t there a separate accounting made for each beneficiary in 2013? The reason is: Separate accounts are recognized for purposes of calculating the RMDs only after the later of (1) the year the separate accounts are established; or (2) the year of the accountholder s death. Since the separate inherited IRAs were not set up until 2013, the separate calculations will be permissible for 2013, and subsequent years, but not for 2012 purposes. 59

60 Illustration of Separate Beneficiary Accounting Rules The distribution periods for 2013 and subsequent years will be determined as follows: Beneficiary Anna Maria David Miquel Age in Initial Distr, Period for Calculation Purposes Distribution Period Distribution Period Distribution Period Distribution Period Distribution Period

61 Illustration of Separate Beneficiary Accounting Rules Annual Rules: There is a second special separate accounting rule to remember. The second special rule is that the separate accounts must be established by December 31 of the year after the year the accountholder died. This requirement has been met, since the separate inherited accounts were established on March 16, If the separate accounts had not been established until March 16, 2013, then Maria, David and Miquel would not qualify to use the longer distribution periods based on their respective ages. 61

62 Must an IRA Custodian provide for Separate Accounting when there are Multiple Beneficiaries? No. This topic should be covered in the IRA Plan Agreement and explained in the IRA Disclosure Statement The vast majority of IRA custodian/trustees use separate accounting for RMD purposes because they set up separate inherited IRAs. However, some financial institutions do not do so. In this case, an IRA beneficiary may wish to determine what his or her transfer options are. By transferring to an IRA custodian who is willing to apply the separate accounting rules a beneficiary may be able to have smaller RMDs for subsequent years. 62

63 Situation # 2 Life Distribution Rule for After RBD Situation If the beneficiary is a living person other than the spouse, or the spouse is not your sole beneficiary, and the IRA accountholder dies on or after the required beginning date, then applicable distribution period for years after the year of death will be based on the remaining life expectancy of the designated beneficiary. The beneficiary s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of death, reduced by one for each subsequent year. If there are multiple beneficiaries, the age of the oldest is used unless the separate accounting rules apply. Note that the 5-year rule does not apply, (i.e. is unavailable) when the accountholder dies on or after his RBD. Exception: If the beneficiary is older than the deceased IRA accountholder then the applicable distribution for years after the year of death will be based on the age of the deceased IRA accountholder for the year he or she died and then 1.0 will be subtracted for each subsequent year. 63

64 Situation # 2 Life Distribution Rule for After RBD Situation Example: Rita Marx is age 81 in She has designated here daughter, Barb Smith age 44 as her sole beneficiary. The balance in Rita s IRA as of 12/31/2013 was $27,000. Her RMD amount for 2013 is $1, ($27,000 / 17.9). She died on 11/8/2013. There is a non-spouse beneficiary, and the accountholder has died after her required beginning date. Barb is entitled to withdraw the RMD amount or an amount greater than the RMD, including a lump-sum distribution. For 2011, the RMD amount will have been determined using Rita s age and the Uniform Lifetime Table. For subsequent years, the RMD amount will be based on Barb s single life expectancy determined for the year following the death. An initial distribution period will be determined for 2012, based on age 45, and then reduced by one for each subsequent year. The initial factor or divisor is Divisors for subsequent years will be 37.8, 36.8, 35.8, etc Rita Marx Dies Factor Age 2014 Age of Beneficiary continues Continue to reduce by

65 Special Rule When Beneficiary is Older than the IRA Accountholder Example: Jack, age 72 dies in His IRA beneficiary is his sister (i.e. a nonspouse), Marcy, age 74. The required minimum distribution for 2013 is based on the age Jack would have attained had he lived all year, using the Uniform Lifetime Table. Starting in 2014, the year after the death, Marcy s RMD will be calculated using Jack s age and not her own. The worksheet on the next page will illustrate the special calculation needed. 65

66 Special Traditional IRA Beneficiary RMD Calculation - IRA Accountholder Dies ON or AFTER the RBD and IRA Accountholder is younger than the non-spouse beneficiary Example: Decedent Age 72 Beneficiary Age 74 Year Factor Year Factor Year of Death 2013(72) (74) N/A * 2011(75) * * * Applicable Factor Note: Decedent s Life Expectancy Factor is Always used 66

67 Decedent/Beneficiary Life Expectancy Comparison Calculation Exception This exception only applies when the IRA accountholder has died on or after his or her required beginning date. In addition, for this to apply, the deceased IRA accountholder must be younger than the beneficiary. Section 1.401(a)(9)-5 Q&A 5 of the Regulations under the Internal Revenue Code provides that if the IRA owner dies on or after his/her required beginning date, the distribution calendar years after the distribution calendar year containing the IRA owner s date of death is the longer of: 1. The remaining life expectancy of the IRA owner calculated in the year of death and reduced by one for each subsequent year; and 2. The remaining life expectancy of the non-spouse beneficiary calculated in the year AFTER year of death and reduced by one for each subsequent year. 67

68 Situation # 3 No Living Beneficiary for Before RBD date If the IRA accountholder did not designate a living person as a beneficiary and died before the required beginning date, then the estate or other beneficiary will be required to use the 5-year rule. The life-distribution rule does not apply (i.e. cannot be used). Rita Marx is age 53 in She has designated her estate as her sole beneficiary. She dies on 11/8/2013. The life-distribution rule is unavailable. Planning Point Some IRA accountholders will want to have separate or multiple IRA plan agreements. IRA # 1 would designate the children and IRA # 2 would designate his or her church. 68

69 Situation # 3 No Living Beneficiary for Before RBD Situation Rita Marx is age 53 in She has designated her daughter, Barb Smith age 24 as her sole beneficiary. Barb died in Rita has not yet designated another primary beneficiary so her estate is her beneficiary. Rita died on November 16, The estate s only option is the 5 year rule. The life distribution rule is unavailable. The IRA must be closed by December 31, Note: We will see this situation may also exist under a Roth IRA and most everyone will see it as being very undesirable. Who wants a Roth IRA to end in 5 years? The IRS may, most others will not. 69

70 Situation # 4 No Living Beneficiary for After RBD If the IRA accountholder did not designate a living person as a beneficiary and died on or after the required beginning date, then the applicable distribution period (i.e. the original factor) for years after the year of death is based on the age and life expectancy of the decedent as determined as of December 31 of the year of death. For subsequent years, the original factor is reduced by one for each elapsed year. 70

71 Example The beneficiary is not a person (e.g. estate or church), and the accountholder has died after her required beginning date. The estate is required to withdraw the RMD amount or an amount greater than the RMD, including a lump-sum distribution. For 2013, the RMD amount will have been determined using Rita s age and the Uniform Lifetime Table. For subsequent years, the RMD amount will be based on Rita s single life expectancy. An initial distribution factor will be determined for 2013 (but not used for 2013, by referencing the Single Life Table) and then reduced by one for each subsequent year. The initial factor or divisor is 9.7 since was 81. Divisors for subsequent years would be 8.7, 7.7, 6.7, etc Rita Marx Dies Factor Age FMV 2% Interest RMD 2014 Rita s Age $47,000 $940 $2, $45,314 $906 $5, $41,011 $820 $5, $36,505 $730 $4,448 continues Inherited IRAs for Non-Spouse Beneficiaries Rita Marx is age 81 in She has designated her estate as her sole beneficiary. The balance in Rita s IRA as 12/31/2012 was $47,000. Her RMD amount for 2013 is $2, ($47,000 / 17.9). She died on 11/08/2013. Continue to reduce by

72 Considerations When The Decedent s Estate Is the Inheriting Beneficiary The decedent s estate generally must be assigned a TIN so the IRA custodian/trustee is able to comply with Form 1099-R requirements. Distributions are made to the estate and reported to the IRS using the estate s TIN. The estate is not required to take a lump sum distribution or immediately close the IRA. If the IRA accountholder died before his or her RBD, then the estate beneficiary must use the 5-year rule. The life-distribution rule does not apply. If the IRA accountholder died on or after his or her RBD, the life distribution rule does apply. However, the initial factor is determined using the age of the decedent in the year he or she died and then reduce this factor by one for each subsequent year. 72

73 Considerations When The Decedent s Estate Is the Inheriting Beneficiary Inherited IRA Sample Pass-Through Language for Legal Opinion Mary Doe has maintained an IRA with ABC institution since She was born on 2/16/1933. She died in July of 2009, at age 76. She had designated her husband as her primary beneficiary. He had died in She had not designated any contingent beneficiary(ies). Her IRA plan agreement indicated her estate was the default beneficiary. Mary s 3 children were each to receive a 1/3 share of her estate. The three children are Nancy, John and Mark. Nancy is the personal representative of the estate. ABC Institution will set up the inherited IRA and title it, The Mary Doe Estate as beneficiary of Mary Doe s IRA. The tax rules do not require the estate to take a lump sum distribution. The life distribution rule applies, but the RMD distribution period will be based on Mary since her estate was her beneficiary. The factor from the Single Life Table is 12.7 since May was age 76 in Nancy will want to check with the attorney assisting her with the estate. It may well be possible under applicable state law for the estate to pass-through to each beneficiary the right to receive these future IRA distributions in such a way that the IRA custodian is able to set up an inherited IRA for each beneficiary. 73

74 Considerations When The Decedent s Estate Is the Inheriting Beneficiary Inherited IRA Sample Pass-Through Language for Legal Opinion We at CWF believe the IRA custodian could set up 3 inherited IRA for the three beneficiary s if an attorney would furnish a legal opinion to the effect: Pursuant to Mary Doe s will, federal law and the laws of State of XX, it is permissible for Mary Doe s estate to pass-through to the estate s three beneficiaries the right to receive the future IRA distributions to which Mary Doe s estate is entitled to receive in distributions over the life expectancy of Mary. That is, the IRA custodian is authorized to establish an inherited IRA for each beneficiary of the estate and close out the estate s inherited IRA. The three inherited IRA accounts would be titled, Nancy as beneficiary of Mary Doe s IRA ; and John as beneficiary of Mary Doe s IRA ; and Mark as beneficiary of Mary Doe s IRA. However, since Mary dies after her required beginning date with her estate as her beneficiary, all three beneficiaries will use an RMD distribution period based on Mary s age. Since Mary attained or would have attained age 76 in 2009, then the divisor for 2010 will be 11.7 ( ). The divisor for 2011 will be 10.7, for 2012 will be 9.7, etc. Each beneficiary, of course, could withdraw in a year any amount larger than the RMD amount. 74

75 Considerations When A Qualified Trust Is the Inheriting Beneficiary There is a special rule for certain trusts. There is no special rule for an estate. The special rule is that the beneficiary(ies) of a qualified trust will be treated as the beneficiary(ies) of the IRA for calculating the applicable distribution period in the RMD calculation, if the following requirements are met: The trust is a valid trust under state law, or would be but for the fact that there is no corpus. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the IRA accountholder. Since the accountholder is deceased, the trust must be irrevocable for this exception to apply to the beneficiary. The beneficiaries of the trust who are beneficiaries with respect to the IRA are identifiable from the trust instrument. The required documentation has been provided to the IRA custodian or trustee. The documentation to be provided depends upon whether the required distributions are occurring before the IRA accountholder has died or after the accountholder has died. 75

76 Considerations When A Qualified Trust Is the Inheriting Beneficiary There are also two ways to meet the documentation requirements when an RMD must be paid to a trust beneficiary after the accountholder has died. This requirement must be met by October 31 of the year after the year the accountholder has died. 1. The trustee of the trust provides the IRA custodian/trustee with a copy of the trust instrument for the trust that is the designated IRA beneficiary as of the IRA accountholder s date of birth. 2. The trustee of the trust provides the IRA custodian/trustee with the following: a. A final list of all the beneficiaries of the trust as of September 30 of the year following the year of the accountholder s death. This list must include all contingent and remainder main beneficiaries with a description of the conditions of their entitlement. b. A certification that the list is correct and complete and that the first three trust requirements discussed above have been met: c. An acknowledgment that he or she will provide a copy of the trust instrument when requested by the IRA custodian/trustee 76

77 Considerations When A Qualified Trust Is the Inheriting Beneficiary If the IRA accountholder died before his or her RBD, then the life-distribution rule will be used unless: The trust would elect to use the five-year rule. The oldest beneficiary of the trust will normally be the measuring life. The separate account rules do not apply to the beneficiaries of a trust with respect to the trust s interest in the accountholder s benefit. For each calendar year after the IRA accountholder s death, the applicable distribution period is initially determined from the Single Life Table by using the oldest beneficiary s age in the year after the accountholder s death and then for subsequent years, adjusting such factor by reducing by one for each calendar year that elapses after the accountholder dies. This distribution period will continue and will not be modified by the death of the beneficiary who is the measuring life. 77

78 Considerations When A Qualified Trust Is the Inheriting Beneficiary If the IRA accountholder died on or after his or her RMD, then the life distribution rule will be used unless: The oldest beneficiary of the trust will normally be the measuring life. The separate account rules do not apply to the beneficiaries of a trust with respect to the trust s interest in the accountholder s benefit. For each calendar year after the IRA accountholder s death, the applicable distribution period is initially determined from the Single Life Table by using the oldest beneficiary s age in the year after the accountholder s death and then for subsequent years, adjusting such factor by reducing by one for each calendar year that elapses after the accountholder dies. This distribution period will continue and will not be modified by the death of the beneficiary who is the measuring life. 78

79 Establishing the Inherited IRA for a Beneficiary Data Processing / IRS Reporting Duties Form 5498 RMD Notices Form 1099-R FMV Statements 79

80 Special Administrative Topics What Special Reporting Duties Apply? Final Form 5498 and FMV Statement must be prepared for the deceased IRA Accountholder on a per plan agreement basis Form 5498 and FMV Statement may need to be prepared for each inheriting beneficiary on a per plan agreement basis A final FMV Statement and Form 5498 must be prepared using the IRA accountholder s name and social security number. The IRS has given the IRA custodian/trustee two options. It may either report the fair market value as of the date of death, or it may report a 0 and instruct the executor that he or she may request the value as of the date of death. A final FMV statement and Form 5498 must be prepared for each inheriting beneficiary showing the fair market value of his or her share as of December 31. If the value is 0 because the beneficiary withdrew his or her entire share, then a Form 5498 does not need to be prepared. Report using a beneficiary s name and social security number. 80

81 Special Administrative Topics Special Form 1099-R Reporting for inherited traditional IRAs Form 1099-R Reporting Rule 1 Transfer of funds from decedent s IRA to the inherited IRA of a non-spouse beneficiary is a non-reportable transfer. Form 1099-R Reporting Rule 2 Every distribution made from an inheriting traditional IRA to an inheriting beneficiary must be reported on a Form 1099-R and coded 4 for death. 81

82 Special Administrative Topics IRA Software for Inherited IRAs Approach # 1 IRA Software generally handles the subject of an inherited IRA in one of two ways. Under the first approach, the system is instructed that the IRA accountholder has died. Various subaccounts are automatically set up for the inheriting beneficiary or beneficiaries and the proper amount of money is transferred into each such subaccount. The system will generate the proper information returns for the decedent and the beneficiary(ies). 82

83 Special Administrative Topics IRA Software for Inherited IRAs Approach # 2 Under the second approach, the software is not written as comprehensively. In order to generate governmental reports to each beneficiary, a separate account is et up for each beneficiary on the computer system independent of the account for the original IRA accountholder. The funds are then transferred from the deceased IRA accountholder s account to the inherited IRA of the beneficiary. Such transfers are non-reportable for Form 1099-R and Form 5498 reporting purposes. The account title. John Doe as beneficiary of Jane Doe s IRA should be used. Because so many computer systems us the second approach, CWF has written its contribution and distribution forms to show that funds may be transferred from a decedent s IRA and transferred into the beneficiary s inherited IRA. 83

84 Special Administrative Topics For Distribution to a traditional IRA Beneficiary Use Code 4 According to the number of consulting calls we receive on the subject, there seems to be confusion as to when to use code 4 (Death Distribution) in box 7 or the Form 1099-R. For any distribution to an inheriting traditional IRA beneficiary, Code 4 is to be used. It does not matter how many years have passed since the accountholder s death: Code 4 is to be used. Note: Code 4 is not used to inform the IRS that an IRA accountholder has died. 84

85 Inherited IRAs for Non-Spouse Beneficiaries Special Administrative Topics Document the Distribution CWF57 85

86 Special Administrative Topics RMD Notice For Non-Spouse Beneficiaries for 2014 Five-Year Rule CWF

87 Special Administrative Topics RMD Notice For Non-Spouse Beneficiaries for 2014 Life Distribution Rule CWF

88 Special Administrative Topics Missed RMDs 50% Tax is owed unless the IRS would waive Form 5329 completed and filed by the beneficiary Special rule - In some cases, the beneficiary may elect to use the 5-year rule rather than the life distribution rule. Example, IRA owner dies in Beneficiary failed to take RMD distribution for 2011 and This beneficiary may elect to use 5-year rule rather than the life distribution rule. If so, the 50% tax is not owed for 2011 and Once the beneficiary switches from the life distribution rule to the 5-year, he or she may not switch again. 88

89 Inherited IRAs for Non-Spouse Beneficiaries Special Administrative Topics Alternative Method Applies to Like-Kind Inherited IRAs Multiple Like-Kind Inherited IRAs Be sure to Document CWF # 312 To be Like-Kind the inherited IRA must arise from the same decedent and be the same type of IRA 89

90 Inherited IRAs for Non-Spouse Beneficiaries Inherited IRAs which arise from the same original IRA accountholder are considered to be like-kind IRAs and may be aggregated for purposes of satisfying the RMD requirement. However, you may not aggregate an Inherited IRA from one person with your own personal IRAs, or with an IRA inherited from a different person. 90

91 Special Administrative Topics RMD Alternative Method Multiple Like-Kind Inherited Traditional IRAs Inherited IRAs from the Same Person IRA # 1 IRA # 2 IRA # 3 IRA # 4 RMD $1,000 $1,200 $1,300 $1,400 Could take $4,900 from any one inherited IRA or any combination of IRAs 91

92 Special Administrative Topics: No Rolling Over an Inherited IRA Ever Traditional or Roth IRA by a Non-spouse Beneficiary 92

93 Special Administrative Topics Transferring an Inherited IRA - Special Procedures If you are the receiving institution, the successor custodian/trustee, you will probably want to get a copy of the IRA plan agreement and beneficiary designation of the deceased accountholder. In addition we recommend that you have the beneficiary sign an IRA plan agreement. CWF now has an inherited IRA Plan Agreement for this purpose. Per the IRS, the account must be titled in this manner: ABC Financial Institution as custodian/trustee for John Jones as beneficiary of James Smith s IRA. The transferring custodian/trustee should be certain that the inherited funds will be properly administered by the successor custodian/trustee and that all required minimum distribution rules will be complied with. The CWF Form #56-Inherited was designed for this purpose. This form, or some other appropriate form, should obtain the beneficiary s signature as well as the signature of the representative for the successor custodian/trustee stating that the proper regulations will be followed. 93

94 Special Administrative Topics Transferring an Inherited IRA - Special Procedures CWF56I CWF56RI 94

95 Special Administration Topic Qualified Charitable Distribution Finally Settled for 2014 IRA Beneficiary must be 70½ or older Distribution must be from Inherited Traditional IRA or Roth IRA Cannot be from an active Inherited SEP or an Inherited SIMPLE IRA Counts toward RMD Even Past due RMDs Distributions must be to eligible charity Distributions must be made directly to the charitable organization Individual can deliver/mail personally Special tax calculation rules Inherited Traditional IRA not Prorated Inherited Roth IRA Not in distribution Order 95

96 RMD Distribution Qualified Charitable Distribution Recommended administration IRA Beneficiary responsibility Document distribution No Special custodian/trustee reporting IRA Beneficiary is allowed to deliver check Maximum of $100,000 per year/per person IRA Custodian/Trustee reports as usual IRA Beneficiary reports on Form 1040 Line 15a and 15b QCD in margin 96

97 Inherited IRAs for Non-Spouse Beneficiaries CWF Form # 57-C Certification for Tax-Free Distribution from Traditional/Roth IRA 97

98 X Traditional IRA Beneficiary 4 X Qualified Charitable Distribution Recommended Administration: IRA Beneficiary responsibility Document distribution No Special custodian/trustee reporting IRA Beneficiary is allowed to deliver check/draft IRA Custodian/Trustee reports as usual 98

99 10,000 0 QCD 99

100 Special Administrative Topics Moving Inherited IRA Funds to an HSA Pursuant to Notice (June 2008), a inherited traditional IRA or Roth IRA beneficiary has the right to make a tax-free transfer of his or her inherited IRA interest to his or her own HSA. It is certainly not clear that the Congress intended to allow a beneficiary to make a tax-free transfer from a decedent s IRA to his or her own HSA, but the IRS has authorized such a transfer in this Notice. And it gets better. When a beneficiary transfers funds from his or her inherited IRA to an HSA, such a transfer will count to satisfy his or her IRA required distribution from the inherited IRA. 100

101 Transfers from IRAs and Inherited IRAs IRA HSA Example Jane has a traditional IRA with a balance of $30,000. She is HSA eligible for She is age 58. She has a family HDHP. No contributions have yet been made to her HSA for She instructs she wished to do a QFD of $7,550. IRA HSA $30,000 $7,550 Used to pay qualified medical expense = tax-free 101