Traps for the Unwary 19 th Annual Maine Tax Forum November 5, 2015 - - PowerPoint PPT Presentation

IRAs and Required Minimum Distributions Traps for the Unwary

19th Annual Maine Tax Forum November 5, 2015

Richard A. Carriuolo, J.D., CFP™ Vice President & Director of Wealth Management Services R.M. Davis, Inc. 24 City Center Portland, Maine 04101

General Rules

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• General Rule: Required Minimum Distributions

(“RMDs”) must begin by April 1 of the calendar year following the year the IRA owner (or plan participant) turns 70 ½ (“Required Beginning Date”,

• r “RBD”)
• Exception: a participant in an employer plan (e.g., a

401(k) or 403(b) plan), not an IRA, who is a 5% or less owner, can defer RMDs until April 1 of the calendar year after the year actual termination of employment occurs

Pre-Death

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• Use the Uniform Table to determine the applicable

divisor (i.e., joint life expectancy of the IRA owner and a 10 year younger beneficiary; the age of the actual beneficiary is irrelevant for this purpose)

– Exception: If the beneficiary is a spouse who is more than 10 years younger, use the special spousal joint life expectancy tables

• Use the account balance as of 12/31 of the prior

calendar year

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Pre-Death

Post-Death

• Before the IRA Owner’s RBD

– Non-Spouse Beneficiary (“Inherited IRA”) Options

• Distribute entire account balance before December 31 of the fifth

calendar year after the year of death

• (If all beneficiaries are individuals) distribute over the single life

expectancy of the oldest beneficiary, commencing the calendar year after the year of death (unless split into separate accounts for each individual beneficiary)

• The IRA language may allow both options, or may be limited to

either option

• No pre-59 ½ early distribution penalties for Inherited IRAs

– Spouse Beneficiary Options

• The spouse has the first two options above for a non-spouse

individual beneficiary, plus:

• The spouse can also defer RMDs until the deceased spouse would

have been 70 ½ and then distribute over the beneficiary spouse’s remaining single life expectancy, or

• The spouse can make a rollover into the spouse’s own IRA (and

then follow the Pre-Death General Rule)

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Post-Death

• After the IRA Owner’s RBD

– Non-Spouse Individual Beneficiary

• Distribute over the single life expectancy of the oldest beneficiary,

commencing the calendar year after the year of death (unless split into separate accounts for each beneficiary)

• Distribute over the theoretical remaining life expectancy of the

decedent (if longer than the single life expectancy of the measuring beneficiary)

– Non-Spouse Non-Individual Beneficiary (e.g., the estate)

• Distribute over the theoretical remaining life expectancy of the

decedent

– Spouse Beneficiary

• Distribute over the spouse’s remaining single life expectancy (as an

“Inherited IRA”) or the decedent's theoretical remaining life expectancy (if longer than the single life expectancy of the spouse)

• Roll over into spouse’s own IRA

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Post-Death

• RMD for Year of Death (after the IRA Owner’s RBD)

– If the IRA owner has not yet taken an RMD for that year, the beneficiary or beneficiaries must take the RMD for that year before December 31 – Taking that RMD does not preclude a beneficiary from later making a timely disclaimer of IRA benefits, for estate/gift planning purposes

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Roth IRAs

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Roth IRAs

• Pre-Death

– There are no pre-death RMDs for Roth IRAs

• Post-Death

– Beneficiaries have the same options available to beneficiaries of a Traditional IRA whose owner died before the RBD

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Aggregation of Account Balances

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Aggregation of Account Balances

• An owner of multiple Traditional IRAs may aggregate

those (and only those) account balances and take the aggregate RMD from one or more of the IRAs

• An inherited IRA beneficiary may only aggregate the

balances of inherited IRAs from the same decedent, and not with any other IRAs owned or inherited

• An inherited Roth IRA beneficiary may only aggregate the

balances of inherited Roth IRAs from the same decedent, and no other

• An owner of multiple 403(b) plan accounts may

aggregate those (and only those) account balances and take the aggregate RMD from one or more of the 403(b) plans (this option is not available to any other kind of employer plan, such as a 401(k) plan)

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Dealing with Multiple Beneficiaries

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Dealing with Multiple Beneficiaries

• To avoid using the life expectancy of the oldest

individual beneficiary for RMDs, split the IRA into separate accounts for each beneficiary, and use each individual beneficiary’s single life expectancy for computing RMDs

– The split must occur by the end of the calendar year following the year of death

• To timely eliminate non-individual beneficiaries,

distribute out to such beneficiaries (e.g., charities) by September 30 of the calendar year following the year

• f death

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Inherited IRAs – Special Issues

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Inherited IRAs – Special Issues

• Titling Example: “[name of decedent] IRA (date of death:

___), for the benefit of [name of beneficiary]”

• Restrictions

– May not roll it to a IRA in the beneficiary’s name – May not make additional contributions to it, or make rollovers to it – May not aggregate RMDs with other inherited IRAs from different decedents – May not be protected in bankruptcy (Clark vs. Rameker) – May not be converted to a Roth IRA

• Death of Original Beneficiary: Unless the IRA documents

prohibit, RMDs may continue (on the same schedule) to the successor in interest of the original beneficiary

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Taxes on Failures to Make RMDs

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Taxes on Failures to Make RMDs

• The tax equals 50% of the distribution shortfall, if it was not

made to whomever was supposed to receive it for that year

• The tax is imposed on the payee (i.e., the beneficiary of an

Inherited IRA, if the RMD was not taken by the decedent in the year of death)

• Waiver: if the failure was due to “reasonable cause”, and the

taxpayer takes immediate steps to correct it:

– File form 5329 (Additional Taxes on Qualified Plans (including IRAs)) – attach an explanation and request the waiver

• Anecdotally: the IRS tends to grant waivers if the correction was

prompt

• If an RMD not taken by 12/15, it may be difficult to accomplish

by year-end, depending on the procedures of the IRA custodian

• IRA custodians must inform IRA owners, but not IRA

beneficiaries, of the RMD requirements

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