Can't view this email? Click here to view in your browser

Forward August's IRA Updates to a Friend
View as a Printable PDF

 In This Update:
  • Q of the Month:
    Can I Combine IRAs with a Family Member?
  • Key Focus:
    Post-Death IRA Distribution Rules
  • Ruling to Remember:
    Prohibited Transactions Galore

 Resources  Expert


?? Question of the Month: Can I combine IRAs with a family member?

Q: Is it possible for 2 people, each with an IRA, to combine them into one IRA, with specific ownership indicated? For example, John Doe has a $60,000 IRA and Jane Doe has a $40,000 IRA at the time of the conversion, then it is listed as "John Doe, as to a 60% interest; Jane Doe, as to a 40% interest."

A: No. The "I" in "IRA" stands for individual. You cannot combine ownership of an IRA. What you can do, however, is name several individual beneficiaries. With multiple beneficiaries you can have different percentages going to different individuals.




5 Roth Recharacterization Cautions

The August issue of Ed Slott's IRA Advisor Newsletter looks ahead to a crucial decision many clients may face over the next few months: the Roth recharacterization.

Some clients may have experienced shock after seeing the tax bill for their 2010 Roth conversions and now want to undo those conversions. That may not always be the best move. Before your clients recharacterize, make sure they are aware of the consequences highlighted in this issue.


Inside Ed Slott's IRA Advisor Newsletter

5 Roth Recharacterization Cautions

  • You could lose existing tax-free gains!
  • You'll blow the 2-year deal!
  • Not so fast... you still have time!
  • Your RMDs will increase!
  • You may not be able to recharacterize the entire conversion!
  • How much gets moved back to the IRA?

Dealing with Multiple IRA Beneficiaries

  • Who is the Designated Beneficiary?
  • The September 30th Beneficiary Determination Date
  • September 30th Alert!
  • Missing the December 31st Deadline
  • Cashing Out a Charitable Beneficiary
  • Possible Pitfalls
  • Splitting the IRA
  • Advisor Action Plan

Guest IRA Expert
Mark Lumia, CFP, ChFC, CASL
True Wealth Group, LLC
The Villages, FL

Coordinating Social Security With IRAs


If you are not already an Ed Slott's IRA Advisor Newsletter subscriber, you can preview past issues before subscribing.

August Key Focus

Post-Death IRA Distribution Rules

There is a lot of confusion when it comes to the post-death IRA distribution rules. Frequently, beneficiaries believe they are subject to what is called the 5-year rule, meaning they have to empty the inherited account within 5 years after the date of death when, in fact, they may have much longer to do so. By "stretching" out distributions from the IRA over a longer period of time, there is a better chance of achieving tax-deferred growth and reducing a beneficiary’s tax burden. If you want to know whether you are subject to (or will be subject to) the 5-year rule, you need only ask two questions. If the answer to either question is "yes", than based on tax laws, you are not subject to the 5-year rule.

Question #1: Were you named directly on the beneficiary form?

Under the Tax Code, there is a big difference between a beneficiary and a designated beneficiary. A designated beneficiary can only be a living, breathing person, while a beneficiary can be any entity, such as an estate or charity. If you are a designated beneficiary named directly on the beneficiary form of a deceased IRA owner, you will generally not have to empty the account within 5 years. Instead, you can set up a properly titled inherited IRA and take only the required minimum distributions (RMDs) out as calculated over your life expectancy. If you are a designated beneficiary, it doesn’t matter at what age the IRA owner died. If you were named on the beneficiary form, you can stretch the IRA.

By the way, the actual life expectancy and the "IRS life expectancy" are not the same thing. Although personal health and well-being may differ drastically from person to person at certain ages, for RMD purposes, the IRS predetermined life expectancy will be the same.

Want to see Question #2? Click here to read our answer and bookmark The Slott Report as your source for retirement planning information.

Ruling to Remember

Case No. 07-14988-WCH

A taxpayer we will call "Clint" has a sole participant profit sharing plan established in 1988. Over the years, he transferred the assets of a realty trust, of which he was the trustee and his wife was the owner of the trust assets to the plan, collected rents and paid bills for the real estate in the plan. He also rented property in the plan to his son, made a loan to the daughter of a close business associate who worked with him from the plan, deposited inherited funds into the plan, and invested plan assets in a venture also funded by personal assets. Needless to say, he made a wide array of prohibited transactions with plan assets.

Six months before declaring bankruptcy, he transferred substantial plan assets to two IRAs. During the bankruptcy proceedings, he disclosed the profit sharing plan but did NOT disclose the IRA assets. How did his bankruptcy claim of exemption for the profit sharing plan and the IRAs go? Not well.

Because he completely disregarded plan rules and engaged in countless prohibited transactions while also failing to disclose the IRAs on numerous occasions, the judge threw the book at him. He lost the exemption for the profit sharing plan since the judge correctly ruled it was no longer a qualified plan. He also lost the exemption for the two IRAs on two grounds. First, they were not funded with qualified money since they came from a disqualified plan and second, they were no longer exempt assets because he failed to disclose them.

But wait, there's more. If IRS becomes aware of the Court's determination, he has acquired a new debt, one that can't be discharged in bankruptcy. He owes IRS income tax on the assets in the plan and in the IRA. And the bad news continues... the assets in the IRA are an excess contribution subject to a penalty of 6% per year for every year they remain in the IRA as of the last day of the year. And there is interest, possible penalties... the list goes on.

Don't mess with your retirement assets in such careless fashion. Follow the rules.

100 Merrick Road     Suite 200E    Rockville Centre     New York     11570
800.663.1340 toll-free     516.536.8282 telephone     516.536.8852 facsmile email

© 2011 Ed Slott and Company, LLC