A spouse beneficiary of an IRA faces many decisions. There is great flexibility and many items to consider. For example, how old was my spouse when he or she passed and what impact will that have on my available choices? Do I need money now? How can I minimize my tax burden? Will penalties apply if I withdraw from the account? By systematically considering each question and leveraging the rules, a spouse beneficiary can create a unique plan that fits his or her needs. After all, with the loss of a spouse, the last thing anyone wants to deal with is money problems derived from poor planning.Example 1: Married couple John and Janet are both 55 years old. John dies and leaves his traditional IRA to Janet. Janet will need immediate access to the account to cover living expenses. Based on these facts, the decision is clear.
Question:For the last three years, I have done a back door Roth conversion. I do the conversion in January.I am 68 years old and I am rolling over my 457(b) New York City deferred compensation plan funds to a rollover IRA with Vanguard. They will get the money around April 1, 2020. Will there be a tax penalty for the 2020 Roth conversion?Answer:When you do a back door Roth conversion, the pro-rata rule applies if you have pre-tax funds in any of your IRAs. In that case, a portion of your conversion will be considered taxable based on the ratio of your pre-tax IRA funds to the sum of all of your IRA funds.
Most workplace retirement plans allowing elective deferrals fall into one of these varieties:401(k) plans for employees of private sector companies.
403(b) plans for employees of tax-exempt employers, public schools and churches.
457(b) plans for employees of state and local governments.
Although many of the tax rules governing these types of plans are the same, there are some important differences. (This article doesn’t cover the Thrift Savings Plan, for federal government workers and the military, or 457(b) “top-hat” plans for employees of tax-exempt employers.)
Many IRA owners have named trusts as their IRA beneficiaries. You may be one. Trusts offer control from the grave and can be a smart choice, especially to protect beneficiaries who may be minors, have special needs or simply are not good with money. Naming a trust as an IRA beneficiary has always had its problems. The rules are complicated and having a trust drafted and administered can come with a hefty price tag. The ability to stretch RMDs over a trust beneficiary’s lifetime, however, was often enough to outweigh the negatives. The SECURE Act changes this equation.Enter the SECURE ActUnder the SECURE Act, most beneficiaries will no longer get the stretch. Instead, most beneficiaries, including trusts, will be subject to a 10-year payout rule. That means all the funds in the inherited IRA must be paid out either to the trust or the trust beneficiaries within 10-years.
Question:Can a QCD be used to pay dues to a charitable organization?Answer:This is an area where we receive a lot of questions. To qualify as a QCD, there cannot be any benefit back to you from the funds that go from your IRA to the charity. Paying dues required for membership would be a benefit back to you and as such would not qualify as a QCD.Question:
Do you want to access your IRA funds penalty-free, even though you are under age 59 ½ and no exception fits your situation? It can be done. Starting a new business and need capital from your IRA, but don’t want to pay the 10% early withdrawal penalty? There is a workaround. Lost your job and require funds to cover your mortgage and cell phone bill, but the only bucket of cash you have is your IRA? There is a pathway to the gold, but it is fraught with danger.Like Indiana Jones sprinting through spiderwebs and dodging poison-tipped darts while leaping bottomless pits, the giant 72(t) boulder will roll fast at your heels. One misstep could result in crushing disaster. However, if it is the golden idol in the rear of the IRA cave you seek, there is a way.The general idea of a 72(t) schedule (or a “series of substantially equal periodic payments”) is to open the door to an IRA before 59½ without a 10% penalty.
One important difference between IRAs and company retirement plans is spousal protection. Except for community property states, spouses of IRA owners do not have any rights to the account. By contrast, many workplace plans must provide spouses at least some financial protection.In the world of company plans, spouses have potentially two types of protection, depending on the type of plan.Spousal Consent to Plan Distributions. The first type of protection requires certain plans to pay a married participant’s benefit as a specific type of annuity – unless the participant elects another form of payment and the spouse consents. The required annuity type is called a “qualified joint and survivor annuity” (QJSA). A QJSA pays a monthly benefit over the participant’s lifetime and, if the spouse outlives the participant, pays the spouse a monthly benefit over the spouse’s remaining lifetime.
An initial ROTH conversion was completed in 2018 for tax year 2018. A second conversion was completed in 2019 for tax year 2019. There was no ROTH IRA account prior to 2018 and the account owner is over 59 ½. The 5-year holding period will be satisfied on 1/1/2023. Does each ROTH conversion transaction have a separate 5-year clock to determine whether earnings are tax free or is it just the initial transaction? Thank you in advance for your assistance.DanAnswer:Dan,For those under the age of 59 ½, yes, each Roth conversion has its own 5-year clock. However, the account holder you are inquiring about is already over 59 ½. As such (and since this is his very first Roth IRA account), he only has to concern himself with the 5-year clock on the 2018 conversion.
Are you looking for a better investment for your IRA? Are you thinking about making the move to another IRA custodian or financial advisor? You do have this opportunity. The IRA rules are set up to allow portability. However, if you are taking required minimum distributions (RMDs) from your IRA, you can still more your money, but things are a little more complicated and you will want to be especially cautious.One way to move your IRA funds is to do a rollover. You will take a distribution of the funds in your IRA. The way the rules work is that the first money distributed from your IRA in a year when you are required to take an RMD will automatically be considered your RMD. With a rollover, there is no ability to take the RMD later. This rule is sometimes called the “first money out rule.” The RMD cannot be rolled over.
For those who inherit IRA accounts in 2020 or later, the SECURE Act permits five groups of people to stretch required minimum distribution (RMD) payments over their life expectancy. As I touched on in a recent Slott Report article (“The Stretch on a Stretcher,” Jan. 13), these five groups fall under the new term “Eligible Designated Beneficiaries,” or EDBs. Two of the five EDBs are self-explanatory:1.) Spouses.2.) Those not more than 10 years younger than the deceased account owner. These people do not need to be related to the deceased account owner.The third group requires a little more detail.3.) Minor children of the account owner. The minor child cannot be a grandchild of the account owner and qualify for the stretch. He or she cannot be the minor child of the neighbor, and cannot be a niece or nephew and qualify. The minor must be the deceased account owner’s child. Even then, the stretch is only allowed until the minor child reaches the age of majority or is still in school, up to age 26.
