Can These Estate Beneficiaries Utilize the Stretch IRA?
By Beverly DeVeny and Jeffrey Levine
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This week's Slott Report Mailbag answers questions on three of our most popular topics: required minimum distributions (RMDs), the stretch IRA and IRA rollovers. The rules are extremely confusing, and we clear them up for these three consumers in the answers below. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
Louis is 87 years old and has been taking his required minimum distributions annually. Louis dies without naming an IRA beneficiary. The IRA passes to Louis' estate. The estate distributes the IRA to each of Louis' four children in equal shares.
What are the options available to each of Louis' children, the estate beneficiaries? Do they have to withdraw the entire IRA within five years of death since the IRA did not have named beneficiary and was left to the estate? Or are other options available to take the distributions over a longer time period?
Thanks for your help.
If the IRA was paid out to the estate and the estate distributed cash to the children, there is no stretch. There is only a taxable distribution to the estate.
If, however, the IRA was retitled as an inherited IRA fbo (for benefit of) the estate and then the estate IRA was transferred to four inherited IRAs, one for each child, then there is a stretch option. The children can stretch the IRA over the remaining life expectancy of the father. This is what the tax code allows. IRA custodial agreements can mandate quicker payouts.
My husband died in mid-October, 2015. His RMD, paid out monthly, was made until September 30, 2015. No further payments have been made since that time and TIAA-CREF will not make any further 2015 RMD payments until I and my two sons, who are also beneficiaries of some of the accounts, have filed all of the paperwork and made the necessary decisions to accept and transfer the accounts to us. TIAA-CREF representatives keep saying that the IRS will waive any penalty in this case for 2015 RMDs not paid until 2016. Can I rely on that? I also dislike that the payment in 2016 will inflate my 2016 taxes unnecessarily, but they are adamant.
TIAA-CREF’s position is arbitrary and unnecessary, but is not uncommon. IRS can waive the 50% penalty for good cause. However, it means that you must file IRS Form 5329 to report the missed distribution and calculate the penalty. You must then request a waiver of the penalty. All of this would be unnecessary if they had been more reasonable.
Note: Make sure the last line on Form 5329 has a zero on it if you are requesting a waiver.
I am a 57-year-old general contractor trying to roll over my annuity from the Arizona Carpenters Trust Fund to my IRA. The information they sent me seems to say that I must be retired and not involved in any way with construction, and they tell me that it will be a withdrawal subject to penalties and taxes. Is this correct or can the funds be rolled over directly without these costs?
Clint E. Carlson
The plan can specify when you are able to take a distribution. If the plan is a “qualified” plan, one that meets all the requirements of the tax code, then any distribution you take can be moved to an IRA or another qualified plan. A direct transfer is preferred. A distribution payable to you that is eligible for rollover will have 20% withheld for taxes. You can make up that amount with out-of-pocket funds to complete your rollover. You will have 60 days from the date you receive the funds to complete the rollover.
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