The Top 3 Questions (And Answers) From Instant IRA Success

By Jeffrey Levine, Director of Retirement Education
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This past weekend, advisors from all across the country gathered at the Mirage Hotel and Casino in Las Vegas, Nevada to spend two days with the Ed Slott and Company team for our latest Instant IRA Success 2-Day IRA Workshop. Over the two days, there were – no doubt – hundreds of questions asked and answered by our team. Here are three of my favorites, along with the answers:

  1. My client is planning on moving to France after he retires. His wife is not a U.S. citizen. Will he be able to leave her his IRA? And if so, when will she have to take distributions?

Questions like this are being asked with greater frequency in recent years as technology and other advances continue to make the world a smaller place. There is nothing in the tax code that requires an IRA owner to leave their IRA to a U.S. citizen. Furthermore, the distribution rules for a spouse are the same no matter whether or not they are a U.S. citizen and regardless of where they live. So, in this case, there is absolutely nothing preventing the client from leaving his IRA to his French-citizen wife who lives in France. She would continue to retain all the options afforded to a spouse beneficiary, including completing a spousal rollover or remaining a beneficiary on the account.

There are some complications though. For instance, the funds will have to remain with a qualified custodian. In addition, while the distribution options the spouse beneficiary will have remain unchanged, the tax treatment of those distributions, including the possibility of mandatory withholding rates, can vary. The precise tax consequences of each distribution will be determined, in part, by the U.S.-France tax treaty.

  1. You talked about the fact that some 403(b) plans are qualified under ERISA and are afforded special protections, while others are not. Can you explain how to tell the difference?

A full explanation of the differences would take quite a while to discuss. Some plans, such as those sponsored by state and local governments are automatically exempt (not covered) by ERISA. Beyond that, without a doubt, the number one thing to look for is whether or not there are employer contributions made to the plan. If the employer makes such contributions, then the plan should be covered under ERISA. If the employer does not make such contributions, then the plan will usually not be an ERISA-covered plan, but further investigation would still be required to make sure. To be honest, the best way of determining whether or not a 403(b) plan is covered under ERISA is to pick up the phone, call the provider and ask questions. Ask for documentation in writing, if possible.

For those wondering, yes, a plan’s status as ERISA-qualified (or not) can make a huge difference in planning. For instance, ERISA-covered plans generally require a spouse to waive his/her rights to plan assets before other beneficiaries can be named. Non-ERISA-covered plans generally don’t. ERISA-covered plan assets generally receive very strong creditor protection at the federal level. Assets in non-ERISA-covered plans generally receive asset protection under state law, which may be much weaker. There are many other reasons, but it’s no doubt already clear, knowing a plan’s ERISA status can be massively important.

  1. My client wants to do a Roth conversion. They have the option to do it as an in-plan Roth IRA conversion or do it as a Roth IRA conversion. Which should they do?

There’s no way that I – or anyone else in this position could tell you what your client should do. That involves careful analysis of their position and is something that only a client and their fully-informed advisors are really capable of determining. That said, in my experience, the overwhelming majority of clients I’ve worked with that have faced a similar choice have opted to complete Roth IRA conversions over their in-plan counterparts. Typical reasons for choosing this option include increased investment options, no RMDs and – perhaps most importantly – the ability to recharacterize their conversion should the market drop (or for any other reason).

Of course, there are certain times when an in-plan Roth conversion is the better option. If, for instance, creditor protection is a key concern, an in-plan Roth conversion may provide better protection than a Roth IRA conversion. Similarly, if a client wishes to access funds via a loan, the in-plan Roth conversion option may be superior. This is by no means a complete list of the plusses and minuses of these respective transactions, but these issues do represent the primary factors that often drive clients’ decisions.

You can get your questions answered and return to your office with an IRA action plan to help clients and gain new business. Join our IRA Experts on July 22-23 in Atlanta. Register here with the code: EARLY BIRD to Save $500.

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