IRA beneficiaries
Question, when I have a client that has an IRA with for example $100,000 in it. He has 2 children. If he specifically names each child as beneficiary of the IRA, they can each stretch it at their life expectancies, correct?? Reason I am asking is that I remember reading that there were times when it was recommended to actually split the IRA into 2 $50,000 accounts and name one child beneficiary of one account and the second child as the beneficiary of the other account, so if the first part of my question is answered yes, then when is it appropriate to split the IRA’s into 2 accounts, or into the number of accounts as children?? Thank you.
Permalink Submitted by Alan Spross on Thu, 2008-08-28 00:38
When there are multiple designated beneficiaries on an IRA account, separate accounts must be created no later than the end of the year following the year of death in order for each beneficiary to use their own life expectancies. If that deadline is missed, the oldest beneficiary’s life expectancy must be applied to both beneficiaries. A main purpose of splitting the IRA accounts while alive is to take that burden off the beneficiaries.
Another possible reason to split the accounts while alive is if the beneficiaries do not get along well and/or will not receive an equal amount. If they do not get along it makes it more difficult to decide how the investments will be allocated prior to separate accounts and how they will be apportioned to each if the account is not converted to cash. While these issues should be able to be worked out easily if both are mature and responsible, that is not always the case. The IRA owner must weigh those things vrs the extra work involved in trying to maintain two accounts while alive that are mirror images and taking identical RMDs from each in order to keep them identical.
If one child needs spendthrift protection, then the IRAs should be split and one left outright and the other to an appropriate trust for the benefit of the spendthrift child.
Permalink Submitted by Shawn Kennedy on Thu, 2008-08-28 15:11
Thank you for the response on the IRA beneficiaries. So in other words in all cases if the beneficiaries want to stretch and use their own life expectancies, they owner of the IRA has to have a separate account for each beneficiary, if not the oldest beneficaries age will apply, am I getting this?? tks.
Permalink Submitted by Janine Janine on Thu, 2008-08-28 18:00
No! Re-read Alan’s explanation, which is the most lucid, detailed and easy-to-understand explanation of IRA beneficiary rules that I have ever come across! Indeed, I have copied and pasted it into my document of IRA notes!
Permalink Submitted by Alan Spross on Thu, 2008-08-28 19:00
If the beneficiaries create their own separate accounts by 12/31 of the year following owner’s death, they CAN use their individual life expectancies. If they do NOT meet that deadline, then the age of the oldest applies to both.
Permalink Submitted by David Schlossberg on Thu, 2008-08-28 20:37
Sean,
In other words, the BENEFICIARIES can split the account – the owner is not required to. The Beneficiaries have until Dec 31 of the year after the year of death to do so. If thye do, they will be entitled to stretch provisions based on each individuals age. If they do not, they are all required to distribute based on the odlest beneficiaries age. Failure to take the full required distirbution will result in a 50% penalty in addition to the tax that should of been paid on the missed porton.
Permalink Submitted by Alan Spross on Thu, 2008-08-28 20:59
Just a note regarding the excess accumulation penalty comment.
If you do not take an RMD, and do not get the penalty excused due to reasonable cause, you would owe 50% of the amount you did not take plus interest on late payment of the penalty. But you do not pay ordinary income tax on the accumulated amount until you actually distribute it. An amount that was not distributed does constitute part of the year end balance for the following year and incrementally increases the RMD for the following year as well.