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 In This Update:
  • Q of the Month:
    Do We Have to Divide Our Roth IRAs Into Separate Accounts?
  • Key Focus:
    Keeping Your Beneficiary Form Safe
  • Ruling to Remember:
    The 10% Penalty Disability Exception

 Resources  Expert


?? Question of the Month: Do we have to divide our Roth IRAs into separate inherited accounts?

Q: My wife and I each have Roth IRA accounts. The beneficiaries of both accounts are our seven grandchildren to be divided equally among them. Will this arrangement stand up or must we each divide our Roth IRAs into seven separate Roth IRAs?

A: It will suffice if the designation of beneficiary form is filled out correctly with your seven grandchildren listed by name as primary beneficiaries and the percentages to each. Of course, it is always best to confirm this with your financial institution. At your death, the IRA can then be separated into shares in an inherited IRA for each grandchild. You can, however, establish separate accounts during your lifetime and name each grandchild as the beneficiary of their share. You would go down that road if you plan to invest the money differently in their shares.




Volatile Markets Spur Roth Recharacterization Decisions

The September issue of Ed Slott's IRA Advisor Newsletter provides in-depth analysis of the Roth Recharacterization deadline (October 17, 2011).

The recent market volatility has made the deadline loom even larger for many who fear that a post-October 17 crash could sting twice as bad since they may lose both investment value and the right to reclaim the taxes they have paid on that lost value through a recharacterization.


Inside Ed Slott's IRA Advisor Newsletter

Volatile Markets Spur Roth Recharacterization Decisions

  • Recharacterization Deadline Approaching
  • Conversion/Recharacterization Options
  • Advisor Action Plan

Reminder: Extended Disclaimer Deadline is Approaching

  • Special Disclaimer Rules for Beneficiaries of 2010 Decedents

Deadline for Opting Out of Estate Tax for 2010 Estates

  • Form 8939 due by November 15, 2011
  • GST Considerations

Guest IRA Expert
Denise Appleby APA, CISP, CRC, CRPS, CRSP
Appleby Retirement Consulting, Inc.
Grayson, Georgia

The Wrong Move Can Destroy an IRA

Reference Chart
2011 Limitations When Individuals Own or Participate in Multiple Retirement Plans


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

September Key Focus

Keeping Your Beneficiary Form Safe

The beneficiary form is the single most important document there is when it comes to your retirement accounts. It determines who will receive your retirement funds, and in a way—thanks to a designated beneficiary’s ability to stretch inherited IRA distributions out over their life expectancy—how much the account will be worth to them. But despite the beneficiary form’s importance, many people don’t know about it. And those that do often take little to no precaution to ensure the forms are properly preserved in the event of a fire, flood or other disaster.

In the last several weeks, the East Coast has been rocked by a hurricane and rolled by an earthquake. Thankfully, the damage from both of these events was not as bad as it could have been, but they should still serve as a reminder that it’s never too soon to take action to secure the documents and valuables most important to you and your family.

Below is a quick 4-step action plan to ensure your beneficiary form is as safe as possible in any circumstance.

1. Check to make sure your current beneficiary designations are up-to-date and reflect your current wishes. If they do not, be sure to contact your financial institution and/or advisor to make sure they are properly updated as soon as possible.

2. Make sure there are no less than three copies of the most up-to-date form(s). The account’s custodian should have a copy, your financial advisor should have a copy and you should also have one on file.

3. Make sure you put your beneficiary form(s) in a safe place in the event of an emergency. For example, many people have small, fireproof safes in their home to protect their valuable documents and other possessions. Why not add your beneficiary form(s) to the safe? If you don’t have a safe, another great location is your safety deposit box at your local bank.

4. Be sure to let beneficiaries, executors and trustees know where they can find copies of your beneficiary forms. You may also want to provide them with the names of your financial advisor(s) and financial institution(s) so that if something does happen to you, they will know where/who to turn to for help.

Ruling to Remember

TC Memo 2011-175

A business owner we will call “David” worked 35 hours per week for one company he owned, ran an Internet company and held partnerships in two other companies.

In 2003, he took distributions totaling over $500,000 from his qualified retirement accounts. In 2005, he received another $8,000 from the same accounts. In each case, a Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts) was issued to David. None of the Forms 1099-R indicated that the relevant distributions were nontaxable, and David did not pay tax on any of them.

In 2009, IRS imposed an additional 10% early distribution penalty under section 72(t) of the tax code. David claimed mental illness, arguing that he was exempt from the penalty under the disability exception.

The ensuing court case determined that David did not have the sufficient evidence of his mental illness outside his own testimony. IRS ruled he was not disabled and still owed the 10% penalty and all past taxes on those distributions.

This is one of those “believe it or not” situations where an individual was trying to avoid paying the 10% early distribution penalty with claims of disability. Section 72(t) of the tax code states that an individual will be considered disabled if he or she is unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment which can result in death or continue for an indefinite duration. David’s claimed mental illness did not satisfy that definition of disability.

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