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Ed Slott's Free IRA Update
December 2008
Volume 1, Number 12
In This Issue
  Focus on - Who is Your Beneficiary
  Question of the Month
  News, Rulings and Other Updates
  Retirement Planning Tip
  Ed Slott's IRA Advisor - December Issue


December Focus - Who is Your Beneficiary?
We are noticing an increase in the number of individuals who thought they were beneficiaries of retirement accounts, only to find out at the death of the account owner that someone else was the named beneficiary and not them. We are also seeing a large number of beneficiaries who miss out on tax-reduction and asset accumulation strategies because the retirement account owners failed to spend a few minutes to make necessary and proper changes to their beneficiary designations. The following are some tips to help you get your beneficiary designation forms in order.
Check Your Beneficiary Form
When is the last time you checked your retirement plan beneficiary form? Your beneficiary may be someone entirely different from who you think it is. There are many cases of former spouses coming forward to claim retirement accounts because the IRA owner forgot to remove their name from a beneficiary form. There are also cases where an individual may have intentionally left a former spouse's name on a beneficiary form, only to have it challenged by current spouses and children who argue that such a situation was due to an oversight. This usually results in the funds being tied up until the issue can be resolved in court and may end up with the beneficiaries having to bear significant costs in the form of legal expenses. To avoid this or other potential issues, you should update your beneficiary form after every life-changing event. These events include marriage, divorce, remarriage, births and deaths. In the event that you want your former spouse to remain as the beneficiary of your retirement account, make sure that fact is abundantly clear to everyone by completing a new beneficiary form after the divorce has been finalized.
Sometimes Your Spouse Must Be Your Beneficiary Unless A Waiver is Provided
You may want to name someone other than your spouse as your beneficiary for various reasons. For instance you may feel that your spouse has already been adequately provided for financially or there is a benefit to naming someone else as beneficiary on your retirement account. However a beneficiary designation form that names someone other than your spouse as a primary beneficiary may be invalid, unless your spouse gives written consent to this designation, and, if necessary, it is properly witnessed. This rule applies to:
  • All qualified plan accounts, such as 401(k)s, profit sharing plans and pension plans
  • ERISA 403(b) accounts
  • Non-ERISA 403(b) accounts where the owner resides in a community or marital property state
  • IRAs, where the owner resides in a community or marital property state
For community and marital property states, state law determines the share that must go to the spouse.
If you desire that someone other than your spouse be a primary beneficiary for one of these accounts, be sure to obtain your spouse's consent and also consult with the plan administrator or IRA custodian to determine the operational requirements. The plan document or state law may require that the consent is notarized or witnessed by a plan representative.
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Is Your Beneficiary Killing the Stretch?
One of the biggest tax advantages available to beneficiaries is the ability to preserve the tax-deferred (or tax-free in the case of a Roth IRA) status for retirement accounts that they inherit. However, this opportunity can be lost if your beneficiary is required to distribute the account in five years or less, or if they are required to use a short life expectancy. This is usually the case if a non-person is named as one of multiple beneficiaries       or if your assets are in a qualified plan or IRA that does not permit the stretch. In many such cases beneficiaries are able to resolve this issue by working with a financial planner knowledgeable in the area of beneficiary strategies. However, the need for this kind of posthumous planning can be prevented by taking simple steps such as setting up a separate retirement account for the assets that you want the non-person - such as a charity - to inherit. If your assets are in a qualified plan and the plan does not permit the stretch, talk to your financial advisor to determine if it makes sense to rollover the assets to an IRA as soon as you are eligible to make a withdrawal from the plan.
One slight oversight or mistake can end up in substantial monetary costs to your beneficiaries. To prevent that from occurring, check your beneficiary designation forms to ensure that they are in keeping with your proposed estate plan. If you are unsure of how they should be completed, consult with your financial planner.
Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.

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Question of the Month
Question:  I have two 403(b) accounts and two traditional IRAs. Can I take my required minimum distribution (RMD) for all four accounts from one of my traditional IRAs?
Answer: No. You cannot take the RMD for your 403(b) accounts from your IRA. You must calculate the RMD amounts separately for each retirement account. However, your distribution options are as follows:
  • Take the calculated RMD amount from each account
  • Aggregate the RMD for the 403(b) accounts and take it from one or both 403(b) accounts
  • Aggregate the RMD for the IRAs and take it from one or both of the IRAs.
If you would like to take your RMD for future years from one account, you will need to rollover the 403(b) accounts to a traditional IRA. Should you decide to rollover the 403(b) accounts, you must take your RMD for the year from the 403(b) accounts before completing the rollover.

News, Rulings and Other Updates

New Form 4972 Issued: The IRS has issued an updated version of Form 4972, Tax on Lump Sum Distributions. If you are making a lump-sum distribution this year, be sure to review the new form which is available at http://www.irs.gov/pub/irs-pdf/f4972.pdf.
Bill to Suspend RMD, Plus Other Provisions
The Worker, Retiree, and Employer Recovery Act of 2008 has been introduced by Senators Max Baucus (D-MT), Mike Enzi (R-WY), Charles Grassley (R-IA), and Edward Kennedy (D-MA). This proposed legislation includes retirement plan related provisions such as:
  • A one year moratorium on required minimum distributions for 2009
  • Requiring that all qualified plans permit rollovers for non-spouse beneficiaries
  • Rollovers from Roth 403(b)s and Roth 401(k)s are not subject to the modified adjusted gross income limit of $100,000
We will keep you posted if any of these proposals become law.

December's Retirement Planning Tip:  Review your Asset Allocation
For many investors who suffered huge losses of their retirement savings due to the recent poor performance of the stock market, it can be argued that those losses are attributable to lopsided portfolios. This is not to say that individuals with more balanced portfolios did not experience market losses also, but with balanced portfolios, the losses are usually minimized through diversity, that is their funds are invested in various instruments which carry different levels of risk. Young investors have the ability to re-build their accounts over time. For pre-retirees and retirees, there is less time to restore their portfolios to their pre-market slump value, which makes it more challenging. Retirees and pre-retirees should work with their financial planners in order to rebalance their portfolios as often as needed. This can help to ensure that their asset allocation is properly balanced for risk, growth and income.

Highlights from Ed Slott's IRA Advisor Newsletter - December 2008 Issue


The December 2008 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:
Looking for the latest info on a certain topic, IRA strategy, recent ruling or tax law change? It's all in here. Each year in the December issue, we include our annual index of articles. This is so you can find everything that we covered during the year.

In addition, our Guest IRA Expert for this month is Natalie Choate whose article "Strategies for Leaving IRA Funds to Charity" includes showing you how to craft an estate plan for clients who wish to leave some or part of their IRA to charity, use a trust and split beneficiary strategies.


Featured Article
Natalie B. Choate, JD Nutter McClennen & Fish LLP
Strategies for Leaving IRA Funds to Charity
  • Leaving IRA Funds to Charity Saves Taxes
  • Naming the Charity as IRA Beneficiary
  • Split Beneficiaries
  • IRA Beneficiary Options
  • Leaving IRA Funds to Charity Through a Trust
  • Spouse First, and Then Charity as IRA Beneficiary
  • What if the Spouse Needs More?
  • Additional Charitable IRA Points
  • Advisor Action Plan
  • 2008 Index of Articles
  • 2008 IRA Experts
  • Year-End IRA Wash Sale Alert

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