Law Tips: 5 Hot Tips on IRA’s

“If an IRA is left to the owner’s estate, it is treated as a ‘no designated beneficiary’ situation and the IRA may require immediate liquidation carrying with it large income tax consequences.”  …A sample of  important estate-planning pointers from Elizabeth Justice, Crawfordsville, Indiana. She provides her expertise during the ICLEF CLE seminar entitled “120 Hot Tips in Estate & Trust Practice.” 

No matter personal or client-related, wouldn’t a few quick reminders about IRAs be prudent?  Let’s take a look at Elizabeth’s overview:

1. Why Is The End Of The Year Important For IRAs?

  • Required Minimum Distributions (RMD) must be taken by a plan participant who has reached age 70.
  • If the plan participant had already begun taking RMD at the time participant died, the full RMD for that calendar year must be taken by the end of that year.
  • Failure to take a timely RMD results in significant penalties equal to half of the RMD and you must file Form 5329.

2. What Is Special About Spouses?

  • In the past, only spouses could roll inherited retirement plans into IRAs. That changed with the Pension Protection Act of 2006 and the Worker, Retiree and Employer Recovery Act of 2008.
  • Since January 1, 2010, all qualified retirement plans are required to permit any non-spouse beneficiary to roll over retirement benefits paid in the form of a lump sum directly into an inherited IRA on a tax-free basis.
  • Retirement Plans that are fully subject to the Retirement Equity Act of 1984 (REA) are required to distribute their benefits to a married employee in the form of a qualified joint and survivor annuity unless the employee signs a waiver and the spouse consents.

Not all retirement plans are subject to REA: IRAs, Roth IRAs and some 403(b) plans are exempt. See Natalie Choate, Life and Death Planning for Retirement Benefits, 7th Edition, Chpt. 3, Sect 3.4 “REA and Spousal Consent” p. 236.

3. When The Participant Dies Who Must Take RMD Before The End Of The Year?

  • Assume that the participant had reached the required beginning date to commence RMD, but that the participant had not yet taken the full RMD for the calendar year.

– The Designated Beneficiary of the IRA must take the RMD.

  • If there is no “Designated Beneficiary” listed in the official records of the Plan Administrator :

– The Plan may require payment to the participant’s estate and the estate must take the RMD.

– It may be possible to prove that the surviving spouse is the sole beneficiary of the estate or of the trust and to have the spouse take the RMD. Further, the spouse may receive the retirement plan benefits in the form of a roll over to an IRA. See Natalie Choate, Life and Death Planning for Retirement Benefits, 7th Edition, Chpt. 3, Sect. 3.2.09, “Spousal rollover through an estate or trust” page 220.

4. Who Pays The Taxes Associated with an IRA leftto the owner’s estate?

  • If an IRA is left to the owner’s estate, it is treated as a “no designated beneficiary” situation and the IRA may require immediate liquidation carrying with it large income tax consequences.
  • The income of the estate is usually distributed out to the beneficiaries of the estate and reported on a K -1 form. Then the beneficiaries of the estate are responsible for reporting the income and paying the income tax on it at their marginal rate.
  • The decedent’s will may provide that “all taxes assessed on assets passing pursuant to the will or otherwise are to be paid by the personal representative from the assets of the estate.”
  • Whether the IRA passes to the estate or to designated beneficiaries, if the will has a provision requiring the residuary of the estate to pay inheritance or federal estate taxes there may be a problem if the IRA is much larger than the other assets of the estate and insufficient funds remain to pay those taxes.

5. Why Does It Pay To Be Old With IRAs?

  • For 2012, individuals over 50 may contribute $6,000 annually to their IRAs. For 2013 that amount rises to $6,500 for those over 50.
  • If you have children, explain to them that setting funds aside for retirement that can grow tax free is important. If they have earned income, they can create a traditional IRA or a ROTH IRA. Consider giving a gift to your child so that he or she can fund an IRA for his or her future.

References and Resources:

Thank you to Elizabeth Justice for permitting me to share her reminders concerning IRAs. If you are interested in hearing her discussion of these issues and the timely information from our expert panel on “120 Hot Tips in Estate & Trust Practice,” Click Here for Video Replay’s near your home or work or for the Online /On Demand Video available Anytime Anywhere!


About our Law Tips faculty contributor:
Ms. Justice opened the Law Office of Elizabeth A. Justice in Crawfordsville, Indiana in 1998. She has a general practice of law in probate, estates, wills, and trusts, as well as real estate, business, and litigation matters. During the previous 15 years Elizabeth also practiced law in San Francisco, California and Lafayette, Indiana. She is involved in her community as the attorney for the Montgomery County Tourism Commission, a member of the Nutrition and Fitness Committee, the Crawfordsville Community School Corporation and the League of Women Voters of Montgomery County.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.

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ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN


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