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 In This Update:
  • Q of the Month:
    How Do I Handle RMDs for Inherited IRAs?
     
  • Key Focus:
    Making Life Difficult For Your IRA Beneficiary
     
  • Ruling to Remember:
    Naming Beneficiaries


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?? Question of the Month: How do I handle RMDs for Inherited IRAs?


Q: I have two inherited accounts after the death of my sister, one an IRA and the other a Roth IRA. When I take my required minimum distribution (RMD) based on my life expectancy next year, does the RMD have to come out of each account separately or can I take it out of whichever account I choose?

A: The distribution must be taken from each inherited IRA. The tax treatments are different for each one (i.e. the IRA is taxable and the Roth is generally tax free). Also, you cannot combine the two inherited IRAs.

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Deadline to Recharacterize 2011 Roth Conversion is Near


The October issue of Ed Slott's IRA Advisor Newsletter clues you in on a deadline that is right around the corner. October 15, 2012 marks the last day on which clients with 2011 Roth IRA conversions can reverse the conversion and get back any taxes paid as a result.

That process is called a Roth recharacterization. It isnít a new process, but there are some new wrinkles that advisors need to make their clients aware of before going through with the Roth undo.

You can read about these subtle wrinkles as well as all about another important October deadline in this issue of the newsletter.

READ ALL ABOUT THIS IN OCTOBERíS ISSUE OF ED SLOTTíS IRA ADVISOR NEWSLETTER


Inside Ed Slott's IRA Advisor Newsletter

Deadline to Recharacterize 2011 Roth Conversions is Near - October 15, 2012

  • Whatís Different About 2011 Roth Recharacterizations?
  • Recharacterization & Reconversion
  • Late Recharacterizations
  • The Right Way to Recharacterize

October 31st Trust Deadline for Inherited IRAs

Early Distribution Due to Hurricane Ike is Not an Exception to the 10% Penalty

  • Carter v. Commissioner
  • Facts of the Case
  • The Courtís Decision
  • Qualified Hurricane Distributions
  • Qualified Disaster Recovery Assistance Distributions
  • IRS Can Postpone Deadlines for Disaster Areas
  • Stopping a Bad Situation from Getting Worse

Gust IRA Expert
Curtis L. DeYoung
American Pension Services, Inc.
Riverton, UT

Making the Most (And Avoiding the Worst) of Self-Directed IRAs

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October Key Focus


Making Life Difficult for Your IRA Beneficiary

Because an IRA account owner is trying to keep things simple or just does not get around to changing a beneficiary form, only one person ends up being named on the beneficiary form. The account owner exacts a promise from the beneficiary that he or she will make sure that the account is split between all of the children, or all of the grandchildren, or all of the siblings, or whoever is important to the account owner. The unwitting beneficiary agrees to this since, after all, it is only fair that the account be split.

Now the account owner has died and the beneficiary wants to do the right thing - split the account the way the owner wanted it done. But there is just one problem. The inherited IRA cannot be assigned or gifted from the inheriting beneficiary to the other intended beneficiaries. Every penny the inheriting beneficiary takes out to give to an intended beneficiary is included in the inheriting beneficiaryís income, NOT the income of the intended beneficiary.

You also run up against the gifting rules. The inheriting beneficiary can only gift up to $13,000 (in 2012) to any individual in the year. If he or she gives more than that, he or she has to file a gift tax return.

Naming just one beneficiary may have kept things simple for the account owner, but it creates a nightmare for the inheriting beneficiary. If the account owner truly wants to keep things simple, then he or she should have a beneficiary form that names exactly who should inherit the asset and it should include the exact share they should inherit.

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Ruling to Remember


Herring and Herring v Campbell

John Wayne Hunter passed away in October 2005. He was a participant in a pension plan governed by the Employee Retirement Income Security Act (ERISA). The plan allowed him to designate a primary and secondary beneficiary.

In 1990 and again in 2001, Hunter designated his wife, Joyce Mae Hunter, as primary beneficiary and did not list a secondary beneficiary. After Joyce Maeís death in 2004, Hunter never designated a new plan beneficiary.

Upon Hunterís death, without a valid designated beneficiary, the plan provided for the distribution of his benefits to one of five classes in the following order of priority: 1) Hunterís spouse; 2) Hunterís children; 3) Hunterís parents; 4) Hunterís surviving siblings; 5 ) The administrator of Hunterís estate.

The plan administrator rejected the possibility that Hunterís stepsons, Stephen and Michael Herring, might be entitled to their stepfatherís benefits. Since Hunterís spouse had predeceased him and he had no surviving parents and no biological or legally adopted children, the plan administrator distributed the benefits to Hunterís six siblings.

Two years later, the stepsons challenged the decision under the Texas probate law doctrine of ďequitable adoption.Ē A district court agreed with the Herrings, but the U.S. Court of Appeals reversed its decision, determining that the plan administrator used a legally correct definition of ďchildrenĒ to determine who was entitled to the benefits.

LESSON TO LEARN:
Itís actually really simple. If Hunter wanted to make sure his stepsons received his ERISA plan benefits, he should have named them as beneficiaries on the plan documents. He left it open to interpretation, and the plan administrator ruled accordingly.