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1 Gettechnical Inc. The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the material; however, the accuracy of this information is not guaranteed. The laws are often changed without prior notice from the government. The publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company's employees. 0

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3 A premature distribution is any distribution from an IRA that the owner receives before he/she is 59 ½ unless it meets certain exceptions. Premature distributions are claimed as ordinary income and are subject to a 10% penalty (except the Simple which has a 25% penalty the first two years) which will be paid at the time the IRA holder pays his/her income tax. 2

4 The tax will be figured on IRS Form 5329 and added to Form The Roth IRA must be held for five years before distributions receive tax-free and penalty-free status. The Roth IRA has the same rules otherwise to avoid the 10% penalty. The Roth conversion IRA has a 10% penalty for five years after conversion. 3

5 Exceptions Reporting on 1099R (Box 7) Reason Traditional IRS Code Roth IRS Code Disability 3 T Death 4 T Rollover 1 J Conversion 2 J Annuity 2 J Higher Education 1 J Medical 1 J First-time Homebuyer 1 J IRS Tax Levy 2 2 Reservist 1 J 4

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7 What is a required minimum distribution? 6

8 IRA owners of traditional IRAs must begin required minimum distributions upon reaching the age of 70 ½. The IRA owner cannot contribute to an IRA in the year that he or she turns 70 ½ and must take the first required minimum by April 1 st of the year after the owner turns 70 ½. IRA owners must take the minimum distribution or be penalized 50% of the amount that he or she should have taken. 7

9 IRA owners often want to take the smallest distribution since most of the time taxes will have to be paid on the IRA. Many IRA owners were eligible for deductions and now must begin claiming the IRA as income. 8

10 The IRA owner may take more out from the IRA. Many IRA owners like to get a monthly or quarterly check but the accountholder must take a distribution at least once annually. The required minimum is the smallest amount he or she must remove every year. 9

11 What is the required beginning date? 10

12 The accountholder must begin distributions from his/her IRA in the year that he/she turns 70 ½. The IRS allows the accountholder until April 1st of the year after the accountholder turns 70 ½ to take out the first year's distribution. This is called the Required Beginning Date. Each year thereafter, a distribution must be taken from the IRA by December 31st. 11

13 The IRA owner does not have to wait until the required beginning date. He or she may take the distribution in the year of turning 70 ½. The required beginning date is really the last date possible to take a required minimum distribution for the first year of turning 70 ½. 12

14 Required Minimum Distribution Year 2015-Year one April 1, 2016 Deadline to Take Distribution 2016-Year two December 31, Year three December 31,

15 What is the formula for calculating the RMD? 14

16 Account Balance on December 31 st Prior Year Life Expectancy * Plus or minus any outstanding rollovers 15

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19 Inherited IRAs and Death Distributions Beneficiaries of IRAs inherit the IRA at the death of the owner. When an accountholder inherits and IRA, he or she receives the funds and in some cases will pay taxes. If the beneficiary is a spouse, the spouse may treat the IRA as own. 18

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21 To Inherit an IRA means to move money to the beneficiary IRA, with the beneficiary s social security number. The distributions are taken out as due to death. The beneficiary is only allowed to pull money out and not to make contributions. 20

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23 When a spouse treats the IRA as own, it becomes his or hers. It is transferred into his or her name and any payments taken out are normal or premature depending on the spouse s age. 22

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25 On all Traditional IRAs the beneficiaries will owe income tax on the distributions from the IRAs unless taxes have been paid previously on a portion such as nondeductible traditional IRAs. For Roth IRA death distributions, the beneficiaries do not owe any penalties even if the beneficiary is under the age of 59 ½. The beneficiaries of Roth IRAs do not owe taxes. 24

26 Traditional IRA Beneficiary (Traditional, SEP & SIMPLE) Roth IRA Beneficiary (five years and death) 10% Penalty Pay Income Tax 10% Penalty Pay Income Tax 25

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28 Under IRC Section 2518 and applicable state law, beneficiaries can disclaim their inheritance. Generally, when a beneficiary wants to give up his or her inheritance or portion of the IRA, he or she will have legal counsel draw up an agreement in keeping with state law. 27

29 This disclaimer will give up the inheritance or take this particular beneficiary out. The operation of the IRA contract and state inheritance law will determine who the beneficiary will be after the disclaimer. The beneficiary disclaiming the inherited IRA will not be able to say who gets the money in his or her absence. 28

30 Qualified Disclaimers Refusal is in writing Transferor of interest has to receive written notice Beneficiary has not accepted interest or any of its benefits Disclaimed money passes to next person in line (spouse or person not disclaiming) 29

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32 A primary beneficiary or beneficiaries will inherit an IRA and pay any taxes due on that IRA, but not the premature distribution penalties. A contingent beneficiary only inherits the IRA if the primary beneficiary or beneficiaries die before the owner of the IRA. 31

33 Beneficiaries Primary Beneficiary Beneficiary who receives IRA at death of owner Contingent Beneficiary Contingent beneficiary only receives IRA if all primary beneficiaries die prior to IRA owner 32

34 Jane named John, her husband, as a primary beneficiary. He died in June. Jane died in August. Following her death, the four children, listed as contingent beneficiaries, inherited because John, the primary beneficiary, was already deceased. 33

35 A beneficiary may be a designated or nondesignated beneficiary. In order to receive the advantages of a longer payout based on the life expectancy of the beneficiary the IRA needs to have a designated beneficiary. See flow chart regarding designated and non-designated beneficiary options. 34

36 Beneficiaries Primary Beneficiary Beneficiary who receives IRA at death of owner Contingent Beneficiary Contingent beneficiary only receives IRA if all primary beneficiaries die prior to IRA owner Designated Beneficiary Named individuals who are primary beneficiaries on Sept 30 of year after owner died (called the determination date) Qualified Trust Nondesignated Beneficiary Estate, trusts, charitable organizations and other entities Contingent beneficiaries Non-qualified trust beneficiaries Combinations of individuals and entities 35

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38 Designation of Beneficiary TIMING The account owner s designated beneficiary is determined on September 30th of the year following the year of death. Now, beneficiaries will be eliminated by disclaimer or removal of their portion prior to the September 30th deadline. This does not mean that each beneficiary will not get his or her portion. The designation of a beneficiary will have to do with the remaining time the IRA may be paid out. The final regulations require the beneficiary to be named at the time of death. 37

39 The account owner s designated beneficiary is determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of September 30 of the calendar year following the calendar year of the account owner s death. Reg 1.401(a)(9)-4 Q & A 4 38

40 Dad has an IRA and his two children are his beneficiaries when he dies. The first, Bob is 40 and Sally is 42. In the year after the IRA holder dies Sally takes out all of her portion of the IRA in August. Consequently, Bob is the only IRA beneficiary on September 30th of the year after his dad dies. You will consider Bob the designated beneficiary. Therefore, Bob, even though he is youngest, will be beneficiary you use to pay out the IRA. Normally you would use the oldest, but in this case the only beneficiary left on September 30th is Bob. 39

41 Multiple Beneficiaries Using Oldest Beneficiary If there is more than one beneficiary on December 31st of the year after the IRA owner dies then you use the beneficiary with the shortest life expectancy (the oldest beneficiary) to determine the amount of the payout. 40

42 Multiple Beneficiaries Separate Accounting-Final regulations 2002 If the beneficiaries of an IRA use separate accounting, then each beneficiary s life expectancy can be used. In order to meet this requirement the separate accounts must be: Set up no later than December 31st of year after the owner died, and Must split the IRA and earnings on a equal basis after the death of owner, and Allocate the distributions to the separate account of each beneficiary receiving that distribution. 41

43 Multiple Beneficiaries Aggregation of IRAs for beneficiaries Beneficiaries may aggregate traditional IRAs that they inherit from the same decedent if the IRA owner died before the required beginning date. 42

44 Beneficiaries Naming Beneficiaries In order for a beneficiary to name a beneficiary: The contract must give permission The original account holder must be deceased State law must permit The financial institution s policy must permit The payouts to the successor beneficiary cannot be longer than the original beneficiary s life expectancy. 43

45 If Dad dies at age 80 and leaves his IRA to his son Matt, then Matt is the beneficiary of Dad s IRA. You would use one last RMD payout using dad s schedule then Matt can use his life expectancy from that point on. If Matt then dies, his beneficiary Paul, his son, would use the life expectancy of Matt and it cannot go any further than that. They can always take the money out faster then life expectancy. 44

46 The spouse beneficiary may decide to treat as own. This decision eliminates the need for payout over the single life of the IRA beneficiary and puts the IRA owner as the spouse. 45

47 A beneficiary may take distributions from one inherited IRA to satisfy their minimum as long as the decedent is the same. (Inherited IRAs may by transferred together or by transferred moved to another institution.) IRA 1 $1,000 Waiver IRA 2 $1,000 Waiver IRA 3 $1,000 Total $3,000 46

48 Sally inherits three IRAs from her father. She may add together the three totals and take from the one with the lowest interest rate. If, however, she inherited another IRA from her mom, she cannot add this one to the previous total. This minimum must come out separately. 47

49 Inherited IRAs may be transferred if you can find a receiving institution. Transferred in name of beneficiary. 48

50 Financial Institution 1 John Doe Set up inherited IRA *see documentation for inherited Financial Institution 1 Mary Smith Beneficiary of IRA of John Doe deceased Financial Institution 2 Mary Smith Beneficiary of IRA of John Doe deceased Transfer Request Form * Take out required minimum (RMD) where required 49

51 Inherited IRA distributions are reported in the beneficiary s name. The beneficiary owes the taxes. If the spouse treats as own the spouse has the same reporting of any other IRA owner. 50

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53 Options for Designated Beneficiary(ies) - When IRA owner dies before 70 1/2 Spouse Treat as Own Beneficiary Inherit Transfer into spouse s own name. Payments to spouse coded Normal or Premature Deadline Begin payouts when spouse is 70 ½, under 70 ½ rules Transfer into inherited IRA. Titled Mary, beneficiary of IRA of John Doe, deceased. Payments to beneficiary coded Due to Death Payout Options --Lump Sum-- 5 years-- Single Life Recalculate Deadline Earlier of fifth year following owner s death or when the IRA owner would be 70 ½. If owner 701/2 in year of death then following Dec 31 st Default: Single Life 52

54 Options for Designated Beneficiary(ies) - When IRA owner dies before 70 1/2 Nonspouse Beneficiary(ies) Inherit Separate accounting applies Transfer into inherited IRA. Titled Mary, beneficiary of IRA of John Doe deceased Payments to beneficiary(ies) coded Due to Death Payout Options --Lump Sum--5 years-- Single Life minus one Deadline Must begin by December 31 st of year after owner died Default: Single Life reduce by one 53

55 Options for Designated Beneficiary(ies) - When IRA owner dies before 70 1/2 Qualified Trust as Beneficiary Inherit Separate accounting does not apply Transfer into inherited IRA in Trust s name. Payments made to Trust coded Due to Death are based on the Single Life of oldest beneficiary minus one. Exception: If spouse is sole beneficiary then can pay over single life expectancy recalculation or five year rule. Deadline: Distributions must begin by later of Dec 31 of the year following the owner s death or Dec31 of the year during which the decedent would be 70 ½. 54

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57 Options for Designated Beneficiary(ies) - When IRA owner dies in 70 ½ Payout Pay beneficiary(ies) last required payout under deceased owner s schedule using Uniform Table Spouse Beneficiary Treat as Own Inherit Transfer into spouse s own IRA. Payments to spouse coded Normal or Premature Transfer into inherited IRA. entitled Mary, beneficiary of John Doe, deceased. Payments to beneficiary coded Due to Death Payments coded Due to Death over spouse s single life recalculated or owner s life expectancy minus one, whichever gives smallest payout or faster Deadline December 31 st of year after owner died. 56

58 Options for Designated Beneficiary(ies) - When IRA owner dies in 70 ½ Payout Pay beneficiary(ies) last required payout under deceased owner s schedule using Uniform Table Nonspouse Beneficiary(ies) or if spouse is not sole beneficiary Inherit Transfer into inherited IRA. entitled Mary, beneficiary of IRA of John Doe deceased Payments coded Due to Death over either beneficiary single life or owner s single life minus one, whichever gives smallest payment Deadline December 31 st of year after owner died 57

59 Options for Designated Beneficiary(ies) - When IRA owner dies in 70 ½ Payout Pay beneficiary(ies) last required payout under deceased owner s schedule using Uniform Table Qualified Trust as beneficiary Inherit Transfer into IRA with trust as beneficiary Payments coded Due to Death over oldest beneficiary of trust s single life minus one or faster Deadline December 31 st of year after owner died 58

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61 There are 2 options for beneficiaries to get IRA payout. First is the Five Year option and the other is Life Expectancy payout. Under Life Expectancy there are 2 ways to calculate this. 60

62 First option the Five Year Option (if owner dies before turning 70 ½) Must take out any time before December 31st of the fifth year. The beneficiary can take it out in small amounts over the five years or just wait until the last year and get one big payout. 61

63 The second option is single life expectancy There are two ways to calculate this: first way to calculate is to use Single Life Reduced by One (Reduction Method) Look up single life of beneficiary in year required to begin and then the next year reduce the life expectancy by one year. For example, Joe, who is the beneficiary, is 50 in year after owner died. Age Life Expectancy

64 The second way to calculate is to use Single Life Recalculation (Attained Age Method) Look up the single life expectancy each year on the chart. For example, Jane, who is the beneficiary, is 50 in year after owner died. Age Life Expectancy 63

65 Beneficiaries who fail to take out distribution by December 31 of the year after the owner died could be subject to 50% Excess Accumulation penalty. 64

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67 An inherited IRA is an IRA which is used to payout the decedent s IRA to his/her beneficiaries. A spouse may treat the IRA as his/her own, but a nonspouse will always inherit the IRA and either take total distribution or set up for payout out of the account. 66

68 Distributions will be coded Due to Death so that the beneficiary will not have any IRS imposed 10% penalty. The beneficiaries will have to pay taxes owed on the money distributed but no penalty. We typically set up an inherited IRA by an internal transfer into the beneficiary or beneficiaries names. 67

69 Inherited IRAs are always styled in the beneficiary s name or names: Mary Smith beneficiary of the IRA of John Doe, deceased. If there is more than one beneficiary, split the account as described in the original contract. 68

70 If you have a $100,000 IRA which is to be split into four equal parts, you will create four inherited accounts to replace the one deceased owner s IRA. Bob Smith beneficiary of the IRA of John Doe, deceased Cal Smith beneficiary of the IRA of John Doe, deceased Pam Smith beneficiary of the IRA of John Doe, deceased Sara Smith beneficiary of the IRA of John Doe, deceased 69

71 Most financial institutions will set up an inherited IRA with the following in the file: Death certificate Copy of decedent s IRA contract Beneficiary election form and W-4P if any distributions are made 70

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73 In the year of death, you will report a 5498 in the decedent s name with a zero balance and new 5498(s) for the beneficiary(ies) with the new balance. 72

74 John Doe dies at 65. He leaves the IRA to his daughter, Mary. The balance is transferred into her name as beneficiary. She takes out $1,000 due to death. 73

75 Reporting Inherited IRA Form 5498 John Doe 0 X 74

76 Mary Smith beneficiary of John Doe IRA deceased 10,000 X 75

77 1,000 1,000 Mary Smith beneficiary of John Doe IRA deceased 4 X 76

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79 If an IRA owner dies in required 70 ½ payout, the beneficiary must take that final distribution due to death before setting it up under the beneficiary s own schedule. It must be paid to the beneficiary or beneficiaries of the IRA. In the next year, the beneficiary will take the distribution under his or her own life expectancy. 78

80 Joe is 75 when he dies and his son Bill, the beneficiary, is 49.. First Step: Last 70 ½ payout to beneficiary The son must take one last payout under his dad s schedule. Take account balance for prior year end divide by 22.9 under uniform table. 79

81 Second Step: In the next year Start using beneficiary s single life minus one, sometimes called reduce by one. Account balance December 31 st PYE divided by Single Life The son begins under his own life expectancy. 80

82 The account balance is $100,000 on December 31 st of prior year end of payout. His payout in the year following the year his dad died is $100,000 divided by 34.2 (single life of 50 year old) and his payout is $2, He may take out more money, but he cannot take out less. 81

83 The financial institution distributes this as due to death. The next year the financial institution takes the previous year s life expectancy 34.2 and subtracts one off and takes the previous year end balance and divides by 33.2 to determine the new amount. 82

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85 The IRA owner, John, dies at 65 and was not in required payout. His granddaughter, Jenny, is his beneficiary and she is 10 years old in year after his death. 84

86 By December 31 st in year after John dies, Jenny must begin distributions based on her single life expectancy minus one or she can elect to distribute the whole IRA in five years after the date of death. 85

87 Since John was not in required payout, Jenny does not have to take a 70 ½ payout in the year he dies. You still have to set up the inherited IRA in her name in the year of death. You set this up by an internal transfer into her name as beneficiary of John s IRA. 86

88 To calculate Jenny s payout in the year of death, take the account balance as of December 31st of prior year and divide by the single life of a 10 year old. For example, $100,000 balance divided by 72.8 = $1, Reduce 72.8 by one the next year and divide by new account balance. 87

89 Again, she can take out more, but never less than the calculated payout until the account has been depleted. All distributions are reported due to death. 88

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93 Inherited IRA Worksheet Name of beneficiary Owner in 70 ½ distribution? Yes No Beneficiary receive last payout? Beneficiary s age in year after owner died Spouse or NonSpouse (circle one) If spouse was the sole beneficiary? Separate accounting apply? Yes or No Spouse (sole beneficiary) Options: Treat as own Single life Expectancy* Five year rule (if owner died before RMD) Nonspouse beneficiary or if spouse is not sole beneficiary: Single Life* Five year rule (if owner died before RMD) No designated beneficiary: Five year rule (If owner died before RMD) IRA owner s single life expectancy (Minus one method) * If death occurred on or after the owner s required beginning date, use either the beneficiary s or owner s single life that results in the longest payout 92

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95 The surviving spouse has the option of treating the IRA as his or her own, or leaving the IRA in her or his spouse s name (inheriting the IRA). The rules allows the spouse to treat as own the IRA even if the spouse is the not the sole primary beneficiary of the IRA. 94

96 Regarding an election to treat as own the IRA may occur automatically, if: (a) the spouse contributes to the IRA, or (b) the distribution from the inherited IRA has not occurred such as a required minimum distribution in the year of death. 95

97 For example, Sally Smith inherits her husband Joe s IRA and fails to take his required minimum distribution now. Next year, she starts with her own life expectancy. 96

98 Spouse may begin life expectancy pay outs and later decide to Treat as Own the IRA. For example, if the spouse was below the age of 59 1/2, the spouse may start with payouts Due to Death under inherited rules and later Treat as Own. 97

99 The spouse beneficiary who treats as own and is below 70½ he or she does not have to begin distributions until he or she is 70½. 98

100 Spouse Beneficiary Examples Decedent in 70 ½ payout Example 1 Spouse Inherits IRA Example 2 Spouse Treats IRA as own Decedent NOT in 70 ½ payout Example 3 Spouse Inherits IRA Example 4 Spouse Treats IRA as own 99

101 Example 1: Spouse Inherits IRA (Decedent IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 88 when he died and left the IRA to Sally Smith his 55 year old wife. Since she is below the age of 59 ½ she wants to inherit the IRA and not treat as her own. Bob Smith IRA 80,000 PYE Balance Internal Transfer Take out his last RMD Sally Smith Beneficiary of IRA of Bob Smith Uniform Table Account Balance December of Prior Year End = Decedent s last payout to Life Expectancy spouse report in her SSN $80,000 = $6,

102 Example 1: Spouse Inherits IRA (Decedent IN 70 ½ Payout) Bob Smith 0 X 101

103 Example 1: Spouse Inherits IRA (Decedent IN 70 ½ Payout) Sally Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 102

104 Example 1: Spouse Inherits IRA (Decedent IN 70 ½ Payout) 6, , X Sally Smith beneficiary of Bob Smith IRA, deceased 4 X 103

105 Example 2: Spouse Treats IRA As Own (Decedent In 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 88 when he died and left the IRA to Sally Smith his 75 year old wife. Since she is over the age of 59 ½ she wants to Treat as her own. Bob Smith IRA Internal Transfer Sally Smith Take out his last RMD Uniform Table Account Balance December of Prior Year End = Decedent s last payout to Life Expectancy spouse report in her SSN $80,000 = $6,

106 Example 2: Spouse Treats IRA As Own (Decedent In 70 ½ Payout) Sally Smith 80,000 or 12/31 Bal. X 105

107 Example 2: Spouse Treats IRA As Own (Decedent In 70 ½ Payout) 6, , X Sally Smith beneficiary of Bob Smith IRA, deceased 4 X Reporting of Bob s RMD in Sally s SSN After the RMD comes out, if Sally takes any money out of the IRA it s coded as Normal Distribution because she is over 59 ½ 106

108 Example 3: Spouse Inherits IRA (Decedent NOT IN 70 1/2 Payout) Bob Smith, the IRA owner (decedent) was 66 when he died and left the IRA to Sally Smith his 50 year old wife. She chooses the five year option. Bob Smith IRA Internal Transfer Sally Smith beneficiary of IRA of Bob Smith, deceased 107

109 Example 3: Spouse Inherits IRA (Decedent NOT IN 70 1/2 Payout) Bob Smith X 0 108

110 Example 3: Spouse Inherits IRA (Decedent NOT IN 70 1/2 Payout) Sally Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 109

111 Example 3: Spouse Inherits IRA (Decedent NOT IN 70 1/2 Payout) 1,000 1,000 X Sally Smith beneficiary of Bob Smith IRA, deceased 4 X If Sally takes a distribution. Sometime in next five years Sally takes all the money out due to death (code 4). If she chooses Life Expectancy, we begin payouts to her the year after death based on her Single Life. 110

112 Example 4: Spouse Treats IRA As Own (Decedent NOT IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 66 when he died and left the IRA to Sally Smith his 65 year old wife. She wants to Treat as her own. Bob Smith IRA $80,000 PYE Internal Transfer Sally Smith 111

113 Example 4: Spouse Treats IRA As Own (Decedent NOT IN 70 ½ Payout) Sally Smith 80,000 or 12/31 Bal. X 112

114 Example 4: Spouse Treats IRA As Own (Decedent NOT IN 70 ½ Payout) 1,000 1,000 X Sally Smith 7 X If Sally takes any money out of the IRA it s coded as 7 for Normal Distribution because she is over 59 ½. If she was under 59 ½ it would be coded as 1 for Premature. 113

115 Nonspouse Beneficiary Examples Decedent in 70 ½ payout Example 1 Nonspouse Inherits IRA Decedent NOT in 70 ½ payout Example 2 Nonspouse Inherits IRA

116 Example 1: Nonspouse Inherits IRA (Decedent IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 88 when he died and left the IRA to Mark Smith his 55 year son. Since he is the son he has to inherit the IRA. Bob Smith IRA 80,000 PYE Balance Internal Transfer Take out his last RMD Mark Smith Beneficiary of IRA of Bob Smith Uniform Table Account Balance December of Prior Year End = Decedent s last payout to Life Expectancy nonspouse report in her SSN $80,000 = $6,

117 Example 1: Nonspouse Inherits IRA (Decedent IN 70 ½ Payout) Bob Smith X 0 116

118 Example 1: Nonspouse Inherits IRA (Decedent IN 70 ½ Payout) Mark Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 117

119 Example 1: Nonspouse Inherits IRA (Decedent IN 70 ½ Payout) 6, , X Mark Smith beneficiary of Bob Smith IRA, deceased 4 X 118

120 Example 2: Nonspouse Inherits IRA (Decedent NOT IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 69 when he died and left the IRA to Mark Smith his 50 year old son. He chooses the five year option. Bob Smith IRA Internal Transfer Mark Smith beneficiary of IRA of Bob Smith, deceased 119

121 Example 2: Nonspouse Inherits IRA (Decedent NOT IN 70 ½ Payout) Bob Smith X 0 120

122 Example 2: Nonspouse Inherits IRA (Decedent NOT IN 70 ½ Payout) Mark Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 121

123 Example 2: Nonspouse Inherits IRA (Decedent NOT IN 70 ½ Payout) 1,000 1,000 X Mark Smith beneficiary of Bob Smith IRA, deceased 4 X 122

124 If Mark takes a distribution. Sometime in next five years Mark takes all the money out due to death (code 4). If he chooses Life Expectancy, we begin payouts to him the year after death based on his Single Life. Note: This would be the same options as a Roth IRA. 123

125 A beneficiary of an IRA may name a beneficiary. The new successor beneficiary has to pay the IRA out in the previous beneficiary s life time. The new successor beneficiary does not get to stretch it out for another life time. 124

126 Example : Successor Beneficiary Bob Smith, the IRA owner (decedent) was 88 when he died and left the IRA to Mark Smith his 55 year son. Since he is the son he has to inherit the IRA. After taking the RMD in the following year Mark dies and leaves it to his son David. Bob Smith IRA 80,000 PYE Balance Internal Transfer Take out his last RMD Mark Smith Beneficiary of IRA of Bob Smith Uniform Table Account Balance December of Prior Year End = Decedent s last payout to Life Expectancy nonspouse report in his SSN $80,000 = $6,

127 Example : Successor Beneficiary Bob Smith X 0 126

128 Example : Successor Beneficiary Mark Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 127

129 Example : Successor Beneficiary 6, X Mark Smith beneficiary of Bob Smith IRA, deceased 4 X 128

130 Example : Successor Beneficiary 1,000 1,000 X Mark Smith beneficiary of Bob Smith IRA, deceased 4 X 129

131 Now we internally transfer the balance to the new IRA successor beneficiary and he begins the distributions and he continues to take payments out under Mark s life expectancy every year. It is as if Mark were still alive but under the name and social security number of the successor beneficiary. You calculate the payment by taking the account balance of 12/31 of the Prior year End and dividing it by Mark s life expectancy. He would have been 56 in the year that he died. Using Mark s single life expectancy of a 56 year old you divide the balance and come up with his number and pay it to David. You will make a payment to David every year thereafter. 130

132 Example : Successor Beneficiary $$$$$ $$$$$ X David Smith successor bene. of Mark Smith beneficiary of Bob Smith IRA deceased 4 X 131

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134 Options for NonDesignated Beneficiary(ies) Owner A dies before 70 ½ payout starts Transfer into name of estate, trust or charity, etc using EIN Payout Options 1. Lump sum distribution, or 2. Distribute to nondesignated beneficiary(ies) within five(5) years or sooner Payment is coded Due to Death Deadline is December 31 st of year after owner dies 133

135 Options for nondesignated Beneficiary(ies) Owner B dies after 70 ½ payout starts Take out last RMD in year of death Transfer into name of estate, trust or charity, etc using EIN Payout Options 1. Lump sum distribution, or 2. Distribute to nondesignated beneficiary(ies) under decedent s Life Expectancy reduced by one each year or sooner Payments are coded Due to Death Deadline is December 31 st of year after owner dies 134

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137 Estate Beneficiary Examples Decedent in 70 ½ payout Example 1 Estate Decedent NOT in 70 ½ payout Example 2 Estate

138 Example 1: Estate (Decedent IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 88 when he died and left the IRA to the Estate. Bob Smith IRA 80,000 PYE Balance Internal Transfer Take out his last RMD The Estate as Beneficiary of IRA of Bob Smith Uniform Table Account Balance December of Prior Year End = Decedent s last payout to Life Expectancy Estate report in Estate s EIN $80,000 = $6,

139 Payout options: Lump sum distribution, or Distribute to nondesignated beneficiary(ies) under decedent s Life Expectancy reduced by one each year or sooner 138

140 Example 1: Estate (Decedent IN 70 ½ Payout) Bob Smith X 0 139

141 Example 1: Estate (Decedent IN 70 ½ Payout) The Estate of Bob Smith beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 140

142 Example 1: Estate (Decedent IN 70 ½ Payout) 6, , X The Estate of Bob Smith beneficiary of Bob Smith IRA, Deceased 4 X 141

143 Example 2: Estate (Decedent NOT IN 70 ½ Payout) Bob Smith, the IRA owner (decedent) was 66 when he died and left the IRA to his Estate. Bob Smith IRA Internal Transfer The Estate as beneficiary of IRA of Bob Smith, deceased 142

144 Payout options: Lump sum distribution, or Distribute to nondesignated beneficiary(ies) within five (5) years or sooner 143

145 Example 2: Estate (Decedent NOT IN 70 ½ Payout) Bob Smith X 0 144

146 Example 2: Estate (Decedent NOT IN 70 ½ Payout) The Estate as beneficiary of Bob Smith IRA, Deceased 80,000 or 12/31 Bal. X 145

147 Example 2: Estate (Decedent NOT IN 70 ½ Payout) 1,000 1,000 X The Estate as beneficiary of Bob Smith IRA, deceased 4 X 146

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149 Special rules after December 31, 2006 will allow nonspouse s beneficiaries to move plans to inherited IRAs. Distributions will then be taken Due to Death. 148

150 Inherited Qualified Retirement Plans (QRP) Rollover to Nonspouse Beneficiary IRA QRP Set up an Inherited IRA *see documentation for inherited Financial Institution Receives check payable to the Financial Institution FBO accountholder Financial Institution Financial Institution sets up an inherited IRA Financial Institution Mary Smith beneficiary of Bob Smith deceased Begin Distributions in year after death-single life expectancy 149

151 If the account does not have a designated beneficiary and the account owner dies after his required beginning date, the remaining balance is paid out over the remaining life expectancy of the owner. Single life minus 1 of the owner of the IRA as if he or she were still alive. 150

152 If the account does not have a designated beneficiary and the account owner dies before his required beginning date, the account balance must be paid out within 5 years after the owner s death. 151

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154 If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. 153

155 QUALIFIED DISTRIBUTIONS TO BENEFICIARIES Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. 154

156 If paid as an annuity (in payments), it must be payable over a period not greater than the designated beneficiary s life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other IRA was inherited from the same decedent. 155

157 If the sole beneficiary is the spouse, he or she can delay distributions until the decedent would have reached age 70 ½ or treat the Roth IRA as his or her own. 156

158 NONQUALIFIED DISTRIBUTIONS TO BENEFICIARIES If a distribution to a beneficiary does not satisfy the requirements for a qualified distribution, it is generally included in the beneficiary s gross income in the same manner as a distribution to the IRA owner when he or she was alive. If the owner of a Roth IRA dies prior to the end of the 5-year period, or the 5-year period starting with the year of a conversion contribution, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. 157

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160 Thanks for participating! Debbie Crawford Gettechnical Inc