Advanced Underwriting Consultants

Ask the Experts – July 11, 2014

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client inherited an IRA from her mother, who inherited the same IRA from her own mother. Can my client stretch RMDs throughout her own life?

Answer: No. IRA distributions can be stretched only by the account owner (after she reaches age 70 ½) and by the account owner’s beneficiary. Since your client isn’t the beneficiary of the original account owner, she cannot stretch RMDs based on her own life expectancy.

Instead she may continue the distribution schedule her mother was using. Of course, your client can take greater distributions than the RMDs if she prefers.

Here’s an example. Suppose Dorothy died in 2003 leaving her daughter, Barbara, an IRA worth $300,000. Barbara turned 57 in 2004, resulting in an RMD period of 27.9 years. Ten years later, in 2013, Barbara died, leaving the IRA, now worth $179,000 to her daughter, Jennifer. In 2014, the distribution period is now 17.9 years (i.e. 27.9 years minus 10 years). Therefore, Jennifer’s RMD for 2014 is $10,000.

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Ask the Experts – May 29

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client inherited an IRA from her mother in 2009. Is it too late to elect to stretch the required distributions?

Answer: Surprisingly, it’s not too late.

The IRS released private letter ruling (PLR 200811028) in which it allowed a taxpayer to make the stretch election after the first year has passed. In this ruling, an individual inherited an IRA but failed to take a distribution for two years. During the third year, the taxpayer requested the ability to stretch by (1) taking a distribution for each of the first two years that she failed to take the required distributions; (2) paying the 50% penalty for not taking the first two years of RMDs; and (3) continuing on the normal stretch path thereafter. The IRS gave the taxpayer its blessings.

Let’s say your client had a life expectancy of 30 years in 2010 (the first year in which distributions are required), and the annuity was valued at $300,000 on the last day of 2009. The RMD required by December 31, 2010, is $10,000. Assuming the funds in the account grow at 6% per year, the next three RMDs are $10,621 (2011), $11,281 (2012) and $11,983 (2013).

Based on PLR 200811028, your client could make the election to stretch by December 31, 2014, but she would be subject to a 50% penalty each year for the amount she failed to withdraw. From the example above, she would accumulate a $21,942 penalty from the four years she failed to take the required distributions from 2010 through 2013. Additionally, she needs to take the RMDs that she missed between 2010 and 2013 ($43,884), which is taxed as ordinary income.

While this is costly, it should be weighed against being hit with an immediate $300,000 of ordinary income. Four years of penalties, however, probably renders this option unusable, but if the client is fairly young and only missed a year or two of RMDs, the penalty might be worth it.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – February 4

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Can the non-spouse beneficiary of an inherited 403(b) account stretch her RMDs based on her own life expectancy? If not, can she roll the account over to an IRA and then use the stretch option?

Answer: Yes, the beneficiary generally has the option to stretch RMDs over her life expectancy, but she should first make sure that her specific plan allows her to stretch.

If her plan does not allow her to stretch based on her life expectancy, she can still achieve a similar result by rolling the inherited 403(b) account into an IRA. The new IRA will be treated as an inherited IRA, and, accordingly, she has the option to stretch RMDs over her own lifetime.

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Question of the Day – May 16

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has multiple nonspouse inherited IRAs.  Can these be aggregated?  Can the minimum distributions be taken from just one account?

Answer: Multiple inherited IRAs can be aggregated so long as they are inherited from the same decedent.  If Tim has one inherited IRA from his father, and another from his brother, those accounts cannot be aggregated.  Tim cannot aggregate the inherited account with his personal IRA, either.  On the other hand, if he inherited two IRAs from his father, those accounts can be combined—through the trustee-to-trustee transfer process—into one.

A distribution that Tim takes from an inherited IRA from his father can count toward the aggregate RMD requirement for all accounts he inherited from his father.  However, distributions from the father’s account do not count toward RMD requirements for Tim’s own IRA, nor do they count toward RMD requirements for the account for his brother.

Inherited IRA accounts may not be aggregated with inherited Roth IRAs, nor do distributions from one satisfy RMD requirements for the other.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – May 4

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client inherited a Roth IRA from his late wife.  The client rolled over the money to his own IRA.  Does his five year holding period start from the time of the rollover?

Answer: No, he gets credit back to the time his late wife made her initial contribution.  The reason the holding period is important is to determine whether any Roth distributions will be qualifying or non-qualifying.

Unlike a traditional IRA, qualifying distributions from a Roth are income tax-free.

A qualifying distribution occurs when an individual takes a distribution following a five year period beginning with the taxable year in which that individual first made a contribution to any Roth IRA in the taxpayer’s own name and one of the following is met:

(1) the distribution is on or after the owner attains age 59-1/2,

(2) the distribution is made to a beneficiary after the death of the owner,

(3) the distribution is on account of the owner’s disability, or

(4) the distribution is a qualified first-time homebuyer distribution.

The ability of the taxpayer to access Roth money on a tax free basis with qualifying distributions is what makes Roth IRAs so attractive.

All other Roth IRA distributions are non-qualifying.  Non-qualifying Roth IRA withdrawals are made according to the following ordering sequence: (1) aggregate annual contributions, (2) conversion amounts, (3) earnings on annual contributions and conversion amounts.

The surviving spouse beneficiary of a Roth IRA gets credit for the deceased spouse’s Roth holding period for the purpose of calculating the five year period.  See Treas. Reg. §1.408A-6, A-7.

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Question of the Day – February 27

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I am working with a family that has an unusual circumstance.  Dad died in 2009, leaving an IRA naming his wife the beneficiary.  She died in 2012 without ever taking control of the account.  My client, the deceaseds’ daughter, was the contingent beneficiary of Dad’s account.  Is she entitled to the IRA?

Answer: Maybe, but not because she was the beneficiary of Dad’s account.

At Dad’s death, the IRA account’s ownership changed to the surviving spouse—even though Mom didn’t do anything to exercise control over the account.  At Mom’s subsequent death, her beneficiary would be the one entitled to the account.  Since under the facts given, Mom didn’t have a named beneficiary, Mom’s estate would be entitled to the money—not Dad’s contingent beneficiary.

The daughter may still be entitled to the money in the IRA if she is Mom’s lawful heir and no one has a prior claim to the IRA in Mom’s estate.  That’s something that would need to be sorted out during the estate administration process for Mom’s estate.

Treas. Reg. §1.401(a)(9)-3, A-5, says that if a surviving spouse fails to make any election after the death of the decedent, on the subsequent death of the surviving spouse, the IRA will be treated as her own for the purpose of the stretch rule.  Thus, any stretch options will be based on the assumption that the estate is the beneficiary of Mom’s IRA.

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Question of the Day – November 1

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Here’s the question of the day.

Question: My client’s spouse died earlier this year.  One of her assets is an IRA that she inherited from her late father.  The deceased was taking required minimum distributions (RMDs) based on her life expectancy when she died.  My client is now the beneficiary of that account.  What are the RMD requirements?

Answer: After the subsequent death of the original beneficiary, the inherited IRA account is payable to the new beneficiary named by the original beneficiary.

The stretch distribution period is the life expectancy of the original beneficiary, using the Single Life Table and the age she attained or would have attained on her birthday in her year of death, reduced by one (1) in each subsequent year.

Here’s an example.  Say the original account owner, aged 90, died in 2010.  His daughter, age 60 in 2010, chose to treat the account as an inherited account.  Her first stretch distribution was due on or before December 31 of 2011.

In year 2011, the daughter is 61 and the factor from the Single Life Table is 23.3.  The account balance for 12/31/2010 is divided by 23.3 (equivalent to 4.29%) and that’s the RMD for 2011.

The daughter’s spouse is the beneficiary of the account.  The RMD for 2012 would be determined by using the daughter’s age of 61 in the year of death and the Single Life Table.  The factor for the daughter’s age in 2011 is 23.3.  For 2012, the account balance on 12/31/2011 would be divided by 22.3 and that’s the RMD.  For 2013, the factor would be 21.3, for 2020 the factor would be 14.3, and so forth.

Eventually, the factor would be less than one, and any remaining account balance would have to be distributed to the beneficiary in that year.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.