Much attention is paid to the favorable options available when spouses are named as IRA beneficiaries. However, a significant portion of IRA assets will end up being inherited by individuals who are not a spouse of the decedent. Many people name siblings, friends, children or others as their IRA beneficiaries. Also, IRA assets that start off with spouse beneficiaries often end up in the hands of non-spouse beneficiaries. How so? A typical scenario is for spouses to name each other as IRA beneficiaries. After the death of first spouse, the surviving spouse will often transfer the inherited IRA assets to an IRA in their own name. At that point they are likely to name a non-spouse beneficiary if they do not remarry. Because IRA assets frequently wind up being inherited by someone other than a spouse, it is critical to understand both the possibilities and pitfalls for these non-spouse beneficiaries.
When an IRA owner dies, there is no probate or other process necessary to transfer the IRA funds to the beneficiary named on the beneficiary designation form. Instead, the IRA becomes the beneficiary’s property by the fact of the IRA owner’s death. Generally, the beneficiary will provide a death certificate to the IRA custodian. The account will then be retitled as a
Question:
Hello,
I am a CPA and was not sure if in 2019 alimony was considered earned income for making a Roth IRA contribution. Would appreciate any clarification you can provide.
Thank you very much.
Have a great day!
Dale
Answer:
Dale,
This issue was one of the changes enacted under the Tax Cuts and Jobs Act. Under the old law, alimony was taxable to the recipient. That means it would be considered earned income and therefore able to be used in making a Roth IRA contribution.
Ivan is an inventor at heart, but he is stuck in an office at a job he does not particularly care for. Ivan constantly daydreams about starting his own company and improving everyday life with his inventions. For 20 years Ivan funds his 401(k) and tinkers with his creations when he gets home from work.
With a burst of inspiration, Ivan invents the widget. He thinks the widget will transform the world. At age 50, Ivan strongly considers quitting his job and starting his own business. However, he needs capital to market and mass-produce the widget. Ivan’s only savings is his 401(k) at the job he doesn’t enjoy. Ivan could roll the 401(k) into an IRA and take a withdrawal, but this would result in taxes and a 10% penalty because Ivan is under 59 ½.
Question:
In 2017, I opened a Roth IRA through my company. Being over 65, I mistakenly thought I could convert Traditional IRA funds to the Roth if I paid tax on the rollover amount. In August 2018, I had Schwab roll $50,000 into my Roth from my traditional IRA. This month (February 2019) when doing my 2018 taxes, I realized that conversions are not allowed in 2018, and withdrawals are not allowed from a Roth younger than 5 years old. What are my options for undoing this situation without paying a 6% yearly penalty? I am prepared to pay income tax on the amount.
Thank You
Chris
Answer:
Chris,
Assuming I understand your terminology, I think I have some good news for you! First, you did NOT make a mistake. Converting Traditional IRA funds to a Roth IRA is certainly still allowed and is a great estate planning tool for the right people.
There are many gaps. Generation gap, stop-gap, The Gap Band. In baseball you can hit into the gap. Football linemen have an A-gap, B-gap and C-gap to concern themselves with. Of course, there is the Cumberland Gap. And there is a very important gap to consider when dealing with IRAs – the “Gap Period.”
The gap period begins on the date of death of an IRA owner and ends on September 30 of the following year. A significant amount of planning activity can, and should, take place within this window, including:
Post-Death Distributions (i.e. “Cash-outs”): If a charity is named as an IRA beneficiary, there is a good chance they will want the money as soon as possible. The same can be said for an individual who does not care to stretch the IRA and would prefer a lump sum payout. These cash-outs should be completed during the gap period.
Question:
If I convert Trad IRA funds to a Roth IRA, does the ratio of After-Tax Contribution to Total IRA holdings include 401k holdings or only IRA holdings.
If you have an IRA, you may have heard the term “required beginning date” or “RBD.” This is an important date that every IRA owner should understand. The significance of the RBD is not limited to IRA owners. It is a critical date for IRA beneficiaries as well. Here are 10 things you need know about the RBD:
1. The RBD for an IRA owner is the date by which the first required minimum distribution (RMD) must be taken.
2. For IRA owners, the RBD is always April 1 of the year following the year they reach age 70 1/2. There is no exception to this rule for IRAs.
3. There are a few exceptions to the April 1 RBD for plan participants. These include the “still working” exception for employer plans and the “old money” exception for 403(b)s. These exceptions do not apply to IRAs.
Question:
Hello Ed,
I have an elderly client in his 80’s, not in the best of health. He has named his spouse (also in her 80’s) along with his 4 children as primary beneficiaries of his IRA. That said, I know the 4 children will have to establish inherited IRA’s – and keep them in such an account forever, receiving RMD’s at the single life table rate. However, is there some special handling that needs to be done by his spouse (who also has her own IRA and of course is receiving her own RMD’s) – since she is not the sole primary beneficiary listed – or should it just be a straight forward spousal rollover of her portion into her own IRA???
Thank you!
Mike
Answer:
Mike:
You have a good understanding of the rules and issues. The key to taking advantage of all the rules is to split the account. Technically, it doesn’t have to be done until December 31st of the year following death, but you could have the client do so now. By splitting the account now, we avoid the post-death deadline, each beneficiary gets to use their own life expectancy for post-death RMDs, and the spouse can execute the spousal rollover (if advisable).
When it comes to 401(k) plans, I feel like the Johnny Cash lyric…“I’ve been everywhere, man.”
I’ve wholesaled record keeping platforms to financial advisors and sold direct to business owners. I’ve taught novice investors about their mutual fund options and crawled through the weeds of 401(k) plan design with CPAs. I’ve helped enroll participants, assisted advisors with fund selection, worked for a third party administrator (TPA), and participated in 401(k) plans myself.
Despite the popularity of retirement plans, understanding how the core pieces fit together remains a mystery to most. In order to explain the moving parts to those looking to implement a new plan, I fashioned an analogy called: “So You Want to Throw a 401(k) House Party.”
So, you want to invest your IRA money in real estate? Every so often we get this question from advisors wondering what they should look out for. Under the tax code, real estate is a permissible investment for IRAs. However, that doesn’t mean it doesn’t carry its own concerns which should cause you to think twice before jumping in. Below are some things you should take into account before using IRA money to purchase real estate.
IRA Custodial Document – Even though the investment is perfectly legal, you need to check the custodial document before making the investment. That’s because IRA custodians can prohibit their accounts from holding real estate. In fact, many do because of the concerns mentioned herein. Thus, investing IRA money in real estate will usually call for a self-directed IRA. Even in this case you still must check the custodial agreement. If your IRA document contains this restriction and you ignore it and invest in real property, you can end up with a taxable event and lose your retirement savings.
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