A major advantage of qualified retirement plans and IRAs is that the income tax on the account’s earnings is deferred until withdrawal. Except for Roth IRAs, the owner must begin taking Required Minimum Distributions (RMDs) by his or her Required Beginning Date (RBD). Generally, it’s the year you turn 70 1/2. However, the real requirement beginning date is determined as follows:
April 1st in the year following the calendar year, in which the owner reaches age 70 ½ or, for a qualified plan, the calendar year in which the owner retires from employment. There is a qualified plan exception for less than 5% owners. In each year beginning with the year of the RBD, the owner must withdraw at least the Required Minimum Distribution (RMD).
RMDs are calculated by dividing the prior year’s IRA 12/31, end of year account balance by the applicable life expectancy factor as provided by the IRS.
Don’t worry! All this is provided on a nice simple chart that the IRS provides and most banks and brokerage firms will compute it for you.
Note: Occasionally, a particular plan may have optional withdrawal terms so each plan must be checked.
Spousal Rollovers: Only a surviving spouse can rollover an IRA (or qualified plan) into his/her own IRA. Once rolled over, the IRA is treated as if all contributions to it had been made by the surviving spouse. In other words, the surviving spouse uses the Life Expectancy Table using his/her own age.
Designated Beneficiary: Upon your death, your beneficiary can choose to:
1) cash in the IRA and pay the taxes or
2) create a STRETCH IRA.
The stretch IRA does not have the tax benefits of a spousal rollover, however it does allow the beneficiary to defer paying all the taxes at the time of inheritance. The beneficiary’s life expectancy is used to determine RMDs in years following the year of the owner’s death. This allows the inherited account to be distributed over the beneficiary’s actual life expectancy, resulting in maximum stretch out and tax deferral.
3 of 4: IRA Trusts Blogs/emails will be published on July 24, 26, 31 and Aug 2.
These informative Blogs can also be found here: https://florida-elderlaw.com/blog
Next time we will discuss how an IRA trust actually works.
Interested in a Seminar on IRA Trusts – Email me at alice@florida-elderlaw.com
Call our South Florida office at 954-726-6602 for additional information about IRA Trusts, Estate Planning and any Long term care needs.
