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In This Update:
- Q of the Month:
Can I Combine IRAs with a Family Member?
- Key Focus:
Post-Death IRA Distribution Rules
- Ruling to Remember:
Prohibited Transactions
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Resources
Expert
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Question of the Month: Can I combine IRAs with a family member?
Q:
Is it possible for 2 people, each with an IRA, to combine them into one IRA, with specific ownership indicated? For example, John Doe has a $60,000 IRA and Jane Doe has a $40,000 IRA at the time of the conversion, then it is listed as "John Doe, as to a 60% interest; Jane Doe, as to a 40% interest."
A:
No. The "I" in "IRA" stands for individual. You cannot combine ownership of an IRA. What you can do, however, is name several individual beneficiaries. With multiple beneficiaries you can have different percentages going to different individuals.
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5 Roth Recharacterization Cautions
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5 Roth Recharacterization Cautions
- You could lose existing tax-free gains!
- You'll blow the 2-year deal!
- Not so fast... you still have time!
- Your RMDs will increase!
- You may not be able to recharacterize the entire conversion!
- How much gets moved back to the IRA?
Dealing with Multiple IRA Beneficiaries
- Who is the Designated Beneficiary?
- The September 30th Beneficiary Determination Date
- September 30th Alert!
- Missing the December 31st Deadline
- Cashing Out a Charitable Beneficiary
- Possible Pitfalls
- Splitting the IRA
- Advisor Action Plan
Guest IRA Expert
Mark Lumia, CFP, ChFC, CASL
True Wealth Group, LLC
The Villages, FL
Coordinating Social Security With IRAs
If you are not already an Ed Slott's
IRA Advisor Newsletter subscriber, you can preview
past issues before subscribing.
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August Key Focus Post-Death IRA Distribution Rules
There is a lot of confusion when it comes to the post-death IRA
distribution rules. Frequently, beneficiaries believe they are
subject to what is called the 5-year rule, meaning they have to
empty the inherited account within 5 years after the date of death
when, in fact, they may have much longer to do so. By
"stretching" out distributions from the IRA over a longer period
of time, there is a better chance of achieving tax-deferred growth
and reducing a beneficiary’s tax burden. If you want to know
whether you are subject to (or will be subject to) the 5-year rule,
you need only ask two questions. If the answer to either question
is "yes", than based on tax laws, you are not subject to the 5-year
rule.
Question #1: Were you named directly on the beneficiary
form?
Under the Tax Code, there is a big difference between a
beneficiary and a designated beneficiary. A designated
beneficiary can only be a living, breathing person, while a
beneficiary can be any entity, such as an estate or charity. If you
are a designated beneficiary named directly on the beneficiary
form of a deceased IRA owner, you will generally not have to
empty the account within 5 years. Instead, you can set up a
properly titled inherited IRA and take only the required minimum
distributions (RMDs) out as calculated over your life expectancy.
If you are a designated beneficiary, it doesn’t matter at what age
the IRA owner died. If you were named on the beneficiary form,
you can stretch the IRA.
By the way, the actual life expectancy and the "IRS life
expectancy" are not the same thing. Although personal health
and well-being may differ drastically from person to person at
certain ages, for RMD purposes, the IRS predetermined life
expectancy will be the same.
Want to see Question #2? Click here to read our answer and
bookmark The Slott Report as your source for retirement
planning information.
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 Ruling to Remember Case No. 07-14988-WCH
A taxpayer we will call "Clint" has a sole participant profit sharing plan
established in 1988. Over the years, he transferred the assets of a realty
trust, of which he was the trustee and his wife was the owner of the trust
assets to the plan, collected rents and paid bills for the real estate in the plan.
He also rented property in the plan to his son, made a loan to the daughter of
a close business associate who worked with him from the plan, deposited
inherited funds into the plan, and invested plan assets in a venture also
funded by personal assets. Needless to say, he made a wide array of
prohibited transactions with plan assets.
Six months before declaring bankruptcy, he transferred substantial plan
assets to two IRAs. During the bankruptcy proceedings, he disclosed the
profit sharing plan but did NOT disclose the IRA assets. How did his
bankruptcy claim of exemption for the profit sharing plan and the IRAs
go? Not well.
Because he completely disregarded plan rules and engaged in countless
prohibited transactions while also failing to disclose the IRAs on numerous
occasions, the judge threw the book at him. He lost the exemption for the
profit sharing plan since the judge correctly ruled it was no longer a
qualified plan. He also lost the exemption for the two IRAs on two grounds.
First, they were not funded with qualified money since they came from a
disqualified plan and second, they were no longer exempt assets because he
failed to disclose them.
But wait, there's more. If IRS becomes aware of the Court's determination,
he has acquired a new debt, one that can't be discharged in bankruptcy. He
owes IRS income tax on the assets in the plan and in the IRA. And the bad
news continues... the assets in the IRA are an excess contribution subject to
a penalty of 6% per year for every year they remain in the IRA as of the last
day of the year. And there is interest, possible penalties... the list goes on.
LESSON TO LEARN:
Don't mess with your retirement assets in such careless fashion. Follow the
rules.
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