IRAs and Required Minimum Distributions Traps for the Unwary

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Rodger Walsh
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1 IRAs and Required Minimum Distributions Traps for the Unwary 19 th Annual Maine Tax Forum November 5, 2015 Richard A. Carriuolo, J.D., CFP Vice President & Director of Wealth Management Services R.M. Davis, Inc. 24 City Center Portland, Maine 04101

2 General Rules 11/5/ th Annual Maine Tax Forum

3 Pre-Death General Rule: Required Minimum Distributions ( RMDs ) must begin by April 1 of the calendar year following the year the IRA owner (or plan participant) turns 70 ½ ( Required Beginning Date, or RBD ) Exception: a participant in an employer plan (e.g., a 401(k) or 403(b) plan), not an IRA, who is a 5% or less owner, can defer RMDs until April 1 of the calendar year after the year actual termination of employment occurs 11/5/ th Annual Maine Tax Forum

4 Pre-Death Use the Uniform Table to determine the applicable divisor (i.e., joint life expectancy of the IRA owner and a 10 year younger beneficiary; the age of the actual beneficiary is irrelevant for this purpose) Exception: If the beneficiary is a spouse who is more than 10 years younger, use the special spousal joint life expectancy tables Use the account balance as of 12/31 of the prior calendar year 11/5/ th Annual Maine Tax Forum

If the beneficiary is a spouse who is more than 10 years younger, use the special spousal joint life expectancy

5 Post-Death Before the IRA Owner s RBD Non-Spouse Beneficiary ( Inherited IRA ) Options Distribute entire account balance before December 31 of the fifth calendar year after the year of death (If all beneficiaries are individuals) distribute over the single life expectancy of the oldest beneficiary, commencing the calendar year after the year of death (unless split into separate accounts for each individual beneficiary) The IRA language may allow both options, or may be limited to either option No pre-59 ½ early distribution penalties for Inherited IRAs Spouse Beneficiary Options The spouse has the first two options above for a non-spouse individual beneficiary, plus: The spouse can also defer RMDs until the deceased spouse would have been 70 ½ and then distribute over the beneficiary spouse s remaining single life expectancy, or The spouse can make a rollover into the spouse s own IRA (and then follow the Pre-Death General Rule) 11/5/ th Annual Maine Tax Forum

individual beneficiary) The IRA language may allow both options, or may be limited to either option No pre-59 ½ early distribution penalties for Inherited IRAs Spouse Beneficiary Options The spouse

6 Post-Death After the IRA Owner s RBD Non-Spouse Individual Beneficiary Distribute over the single life expectancy of the oldest beneficiary, commencing the calendar year after the year of death (unless split into separate accounts for each beneficiary) Distribute over the theoretical remaining life expectancy of the decedent (if longer than the single life expectancy of the measuring beneficiary) Non-Spouse Non-Individual Beneficiary (e.g., the estate) Distribute over the theoretical remaining life expectancy of the decedent Spouse Beneficiary Distribute over the spouse s remaining single life expectancy (as an Inherited IRA ) or the decedent's theoretical remaining life expectancy (if longer than the single life expectancy of the spouse) Roll over into spouse s own IRA 11/5/ th Annual Maine Tax Forum

beneficiary) Non-Spouse Non-Individual Beneficiary (e.g.

7 Post-Death RMD for Year of Death (after the IRA Owner s RBD) If the IRA owner has not yet taken an RMD for that year, the beneficiary or beneficiaries must take the RMD for that year before December 31 Taking that RMD does not preclude a beneficiary from later making a timely disclaimer of IRA benefits, for estate/gift planning purposes 11/5/ th Annual Maine Tax Forum

December 31 Taking that RMD does not preclude a beneficiary from later making a timely

8 Roth IRAs 11/5/ th Annual Maine Tax Forum

9 Roth IRAs Pre-Death There are no pre-death RMDs for Roth IRAs Post-Death Beneficiaries have the same options available to beneficiaries of a Traditional IRA whose owner died before the RBD 11/5/ th Annual Maine Tax Forum

available to beneficiaries of a Traditional IRA whose

10 Aggregation of Account Balances 11/5/ th Annual Maine Tax Forum

11 Aggregation of Account Balances An owner of multiple Traditional IRAs may aggregate those (and only those) account balances and take the aggregate RMD from one or more of the IRAs An inherited IRA beneficiary may only aggregate the balances of inherited IRAs from the same decedent, and not with any other IRAs owned or inherited An inherited Roth IRA beneficiary may only aggregate the balances of inherited Roth IRAs from the same decedent, and no other An owner of multiple 403(b) plan accounts may aggregate those (and only those) account balances and take the aggregate RMD from one or more of the 403(b) plans (this option is not available to any other kind of employer plan, such as a 401(k) plan) 11/5/ th Annual Maine Tax Forum

only aggregate the balances of inherited Roth IRAs from the same decedent, and no other An owner of multiple 403(b) plan accounts may aggregate those (and only those) account balances and

12 Dealing with Multiple Beneficiaries 11/5/ th Annual Maine Tax Forum

13 Dealing with Multiple Beneficiaries To avoid using the life expectancy of the oldest individual beneficiary for RMDs, split the IRA into separate accounts for each beneficiary, and use each individual beneficiary s single life expectancy for computing RMDs The split must occur by the end of the calendar year following the year of death To timely eliminate non-individual beneficiaries, distribute out to such beneficiaries (e.g., charities) by September 30 of the calendar year following the year of death 11/5/ th Annual Maine Tax Forum

occur by the end of the calendar year following the year of death To timely eliminate non-individual beneficiaries, distribute out to such

14 Inherited IRAs Special Issues 11/5/ th Annual Maine Tax Forum

15 Inherited IRAs Special Issues Titling Example: [name of decedent] IRA (date of death: ), for the benefit of [name of beneficiary] Restrictions May not roll it to a IRA in the beneficiary s name May not make additional contributions to it, or make rollovers to it May not aggregate RMDs with other inherited IRAs from different decedents May not be protected in bankruptcy (Clark vs. Rameker) May not be converted to a Roth IRA Death of Original Beneficiary: Unless the IRA documents prohibit, RMDs may continue (on the same schedule) to the successor in interest of the original beneficiary 11/5/ th Annual Maine Tax Forum

different decedents May not be protected in bankruptcy (Clark vs.

16 Taxes on Failures to Make RMDs 11/5/ th Annual Maine Tax Forum

17 Taxes on Failures to Make RMDs The tax equals 50% of the distribution shortfall, if it was not made to whomever was supposed to receive it for that year The tax is imposed on the payee (i.e., the beneficiary of an Inherited IRA, if the RMD was not taken by the decedent in the year of death) Waiver: if the failure was due to reasonable cause, and the taxpayer takes immediate steps to correct it: File form 5329 (Additional Taxes on Qualified Plans (including IRAs)) attach an explanation and request the waiver Anecdotally: the IRS tends to grant waivers if the correction was prompt If an RMD not taken by 12/15, it may be difficult to accomplish by year-end, depending on the procedures of the IRA custodian IRA custodians must inform IRA owners, but not IRA beneficiaries, of the RMD requirements 11/5/ th Annual Maine Tax Forum

it: File form 5329 (Additional Taxes on Qualified Plans (including IRAs)) attach an explanation and request the waiver Anecdotally: the IRS tends to grant waivers if the correction was prompt If an

Required Minimum Distributions: What Every Advisor Needs to Know FOR FINANCIAL PROFESSIONAL USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION.

Required Minimum Distributions: What Every Advisor Needs to Know 1 Required Minimum Distributions Upon reaching age 70½, clients must begin taking annual distributions from their IRA in accordance with