Spousal Beneficiaries, Inherited IRAs and RMD Questions Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week’s Slott Report Mailbag answers questions about spousal beneficiaries, inherited IRAs and keeping the Stretch IRA provision (biggest benefit in the tax code!) for your heirs and required minimum distributions.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Ed:

I have your book, but unfortunately it is at my cabin so I don’t have access right now. I am inheriting a Roth IRA from my wife, who recently passed away at 65. It was converted to a Roth in December 2008.

First question: Is it better to keep it as a separate Roth IRA, or add it into my existing Roth IRA?

Second question: Do I have to take RMDs on this account now or later? 


Thanks,

John in AZ

Answer:
Question 1. As a spouse beneficiary you have two choices, other than taking a complete distribution.

A. You can establish a beneficiary Roth IRA or
B. Make it your own Roth IRA

If you select option B you will not have to take required minimum distributions (RMDs). With Option A, you would be required to take RMDs beginning in the year the deceased spouse would have attained age 70 1/2. Option B gives you the most flexibility. You can take distributions at any time (or not). It is your option. Distributions will be tax-free. Make sure you name your own beneficiary when you select your option.

Question 2. If you make it your own Roth IRA, you could combine it with your own Roth IRA.

2.

Dear Mr. Slott,

In regards to Roth IRA and estate planning:

My estate planner is recommending that I make my spouse the primary beneficiary for my Roth IRA, and that his trust should be the contingent beneficiary. I believe that your book suggests that children should be the beneficiaries. I have 2 adult children. What is the best way to protect my Roth IRA in this situation?

Thank you

Answer:
Naming a trust as beneficiary of retirement assets, in your case as a contingent beneficiary, can create tax and estate planning complications. You would generally use a trust for personal (non-tax) reasons. For example, to restrict access in some way, such as when the IRA beneficiary is a minor, disabled, incompetent, or unable to make his or her own decisions. The main purpose is usually to control or protect post death distributions from the inherited Roth IRA. You need to know what the trust is going to accomplish and determine if a trust is the only way to accomplish your goal. If a trust is appropriate, it must qualify under various IRS rules in order to compute post death distributions (the stretch IRA concept). If the trust does not qualify, the stretch IRA option is lost. The trust beneficiaries can only stretch distributions over the age of the oldest trust beneficiary. You never want to name a trust that is intended to terminate soon after the death of the Roth IRA account owner. If the intent is for the children to inherit outright, then name the children and avoid all potential trust problems. Generally you would name your spouse as primary beneficiary. If he definitely does not need the money in the Roth IRA, you could consider naming your children as primary or contingent beneficiaries.

3.

I retired at 68 from a 40-year career in local government with a pension and over $900,000 in the retirement plans. If and when I die, I will leave the balance of my 457(b) and 401(k) to my 18-year-old son. Will he be able to stretch RMDs over his lifetime? Most of the retirement books deal with IRAs and 401(k)s. Are there any books that deal specifically with 457(b) plans? Thank you.

Answer:
Distribution rules are generally the same for 401(k) and governmental 457(b) plans in regards to RMDs at age 70 1/2 or for an inherited plan. Effective as of 2007, a non-spouse beneficiary (like a child or grandchild) who is named on the beneficiary form and inherits a 401(k) or governmental 457(b) plan balance can transfer that plan balance directly to a properly set up inherited IRA that can be stretched over their lifetime. Beginning in 2010, company plans must allow this post death transfer. The transfer must be done as a direct rollover (trustee-to-trustee transfer) from the plan to an inherited IRA. Both the transfer and the first RMD must be done by December 31st of the year after the plan participant’s death. If those deadlines are not met, the distributions must be made in accordance with the options available in the plan, not those available in the inherited IRA.