Oftentimes with these articles, I compare certain retirement account rules to arbitrary items. A creative metaphor or simile can help the reader grasp a concept. For instance, past entries have referenced revolving doors, hurricane preparedness, Bloody Mary cocktails, Charlie Brown’s Halloween costume, genies in lamps and even Indiana Jones. But I was struggling. No single comparison seemed to carry the weight necessary to create an entire Slott Report submission. So, here is a 6-pack of random summertime similes and other retirement account comparisons.
When an IRA owner dies, we look to the beneficiary form to determine who should receive the IRA funds. After death, there is a transition process as assets are moved into an inherited IRA for the beneficiary. But what if the beneficiary dies after the death of the original IRA owner, but prior to claiming the account?
Question:
I have a large amount of stock from a previous employer in my 401(k). I had been reinvesting the dividends for the last 23 years since I left the company. I no longer want to reinvest the dividend to buy additional shares. Most of the stock has appreciated considerably since I bought it.
A couple of years ago I was asked what the tax consequences are when a Roth IRA is split in divorce. After a pause, I answered honestly: “I have no idea…but will find out.” In fact, there is no specific guidance in the Tax Code or in the regulations on how to handle such a transaction.
For deaths in 2020 or later, we know that a non-eligible designated beneficiary (NEDB) of an IRA is subject to the 10-year rule. Meaning, the account must be emptied by the end of the tenth year after the year of death. In its proposed SECURE Act regulations, the IRS takes the position that when death occurs on or after the required beginning date (RBD – generally April 1 of the year after a person turns 73), an NEDB must also take annual required minimum distributions (RMDs) in years 1 – 9 of the 10-year period.
Question:
In 2021, my wife inherited an IRA from her sister who was 4 years younger. My wife therefore is an EDB (eligible designated beneficiary). Her sister was 66 years old at date of death. My wife has been taking RMDs based on her own age. What happens when my wife dies? Do all the following beneficiaries have 10 years to deplete the inherited IRA? Are there RMDs that need to be taken each year for those beneficiaries? If so, is the RMD based on the factor that my wife was using?
I got into some poison ivy and am suffering the consequences. It takes a few days for the welts to appear, but they are in full bloom. While I did take precautions before starting my yardwork (gloves, long sleeve shirt, etc.), in retrospect I could have been more careful. The frustrating part is, there isn’t a whole lot you can do once the swelling appears. Ice, some anti-itch spray, try not to scratch too much, and just methodically work through this incredibly uncomfortable irritation.
Question:
Am I correct to assume if I leave my Roth IRA to my 2 adult children, they will have to take all the money out by the end of year 10 and they will have NO taxes to pay on it because it is a Roth? They can take some out each year with NO taxes due, but have the option to leave it all in the account for 10 years, if they desire.
Thank you!
Louise
This past week the Ed Slott team hosted another successful conference for our Elite IRA Advisor Group members. Well over 300 advisors from across the country descended on Washington D.C. for two days of intense IRA training. In addition to discussing all the newest SECURE 2.0 rules, we made sure to cover the foundational beneficiary principles created by the original SECURE Act, which went into effect in 2020. It is our steadfast belief – and our member advisors agree – the best way to learn new concepts is through repetition and reinforcement.
In my April 12 Slott Report entry (“5 Reasons to Open a Roth IRA Immediately!”), I included a handful of points as to why it was imperative to open a Roth IRA, especially before the tax filing deadline. But a coin has two sides. Here are 5 reasons why you should NOT open a Roth IRA:
