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Federal Employees News Digest : Dec 23, 2013
Employees who are the non-spousal beneficia- ries of an Individual Retirement Arrangement (IRA) (traditional or Roth) owner need to under- stand the rules that govern inherited IRAs. While the rules governing the creation of and contribu- tions to an IRA are somewhat easy to understand, the rules for inheriting and distributing IRA assets upon the death of the IRA owner are complex. Failure to do what is required with respect to inheriting an IRA can result in huge IRS penalties. This column discusses the rules for non-spousal IRA beneficiaries of deceased IRA owners. The rules for inheriting IRA assets generally depend on two factors: (1) One's relationship to the original IRA owner and (2) the type of IRA owned. In particular, spousal beneficiaries have different options as to what they can do with an inherited IRA compared to non-spousal beneficiaries. Also, the IRS requires traditional IRA owners---but not Roth IRA owners---to start taking minimum required distributions (MRDs) no later than April 1 following the year in which they become age 70.5. A non-spousal IRA beneficiary's course of action will be determined by their age, the age of the deceased IRA owner, and the type of IRA inherited. But a non-spousal beneficiary is not allowed to roll over or to transfer the inherited IRA assets into their own IRA. The two options for non-spousal beneficiaries of an inher- ited IRA are presented below. Option 1: Transfer assets to an 'inherited' IRA beneficiary distribution account. When a non-spousal IRA beneficiary transfers assets from either a traditional or Roth IRA into an IRA beneficiary distribu- tion account---called an "inherited" IRA---the rules for MRDs will apply. What this means is that the inherited IRA owner is required to withdraw a minimum amount---the MRD---from their inher- ited IRA each year based on their age and life expectancy. The MRDs are required to begin at any age, even before age 70.5, with the first MRD no later than Dec. 31 of the year following the death of the original IRA owner. MRDs are subject to federal and state income taxes, but no early withdrawal penalty (10 percent). In the case of a Roth IRA, if the IRA assets were in the account for at least five years, then distributions are tax-free. The first MRD for a given year is computed as follows: Take the inherited IRA account balance as of Dec. 31 of the preceding year and divide that number by the inherited IRA owner's single life expectancy shown in the IRS Single Life Expectancy Table (IRS Publication 590, www.irs.gov) for the year of distribution. The following example illustrates. Glenn, age 45, inherits his mother's traditional IRA during 2013 after her death in 2012. As of Dec. 31, 2012, Glenn's inherited IRA value was $40,700. From IRS Publication 590, Glenn's single life expec- tancy at age 43 is 40.7 years. For the year 2013, Glenn's MRD is: $40,700/40.7 or $1,000. Glenn has until Dec. 31, 2013, to withdraw at least $1,000 from his inherited IRA. If the original IRA owner died before reach- ing age 70.5, then the inherited IRA owner has the option to receive the inherited IRA by Dec. 31 of the fifth year following the IRA owner's death. If the original IRA owner died after reach- ing age 70.5, then the inherited IRA owner must continue to take MRDs from the inherited IRA. But the inherited IRA owner has the option of calculating the MRD using his age (as illustrated above) or using the deceased IRA owner's age in the year of death. This option may be advantageous if the inherited IRA owner is younger than the deceased IRA owner because of longer life expectancy and smaller MRD. It is important to note that any funds remaining in the traditional IRA continue to grow tax-deferred and any funds remaining in the Roth IRA continue to grow tax-free until the funds are withdrawn as part of future MRDs. Option 2: Disclaim (decline to inherit) all or part of the assets. If an inherited IRA owner disclaims all or part of the IRA assets they are entitled to, then the assets will pass to other eligible beneficiaries. If no other beneficiaries exist, then the assets will pass to the original IRA owner's spouse and then to the estate. A decision to disclaim IRA assets must be made within nine months of the original owner's death and before taking possession of the assets. The decision is irrevocable. Some other key points for inherited IRA owners: (1) A direct transfer and not a direct rollover must be made from the deceased's IRA to the inherited IRA. There is no option for a 60-day rollover when inheriting IRA assets. (2) Commingling of IRAs is not permitted. Different types of IRAs---traditional, Roth and SEP, etc.---cannot be combined into a single inherited IRA. Those employees who are non-spousal beneficiaries of IRAs whose owners died prior to Jan. 1, 2013, and who have elected to take their MRDs over their life expectancy should make sure they make their 2013 MRDs no later than Dec. 31, 2013. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Year end is deadline for non-spousal beneficiaries to receive minimum required distributions December 23, 2013 Vol. 63, No. 23 7 Visit us on the Internet at www.FederalDaily.com
Dec 16, 2013