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Retirement Accounts

What is a Plan Administrator or Plan Custodian?

What is a Designated Beneficiary?

What is a Beneficiary Designation form?

What is a Required Minimum Distribution (RMD)?

What is the "IRA Account Balance"?

What is the Required Beginning Date (RBD)?

What is a Stretch IRA?

What tax penalties can be assessed against retirement plans

Can retirement plan assets be moved to another plan administrator?

What is a Traditional IRA?

What happens if a Traditional IRA account does not have a designated beneficiary?

What happens if the spouse is named as beneficiary of an IRA?

May a trust be named as a beneficiary of a Traditional IRA?

What is a Roth IRA?

What happens if a Roth IRA account does not have a designated beneficiary?

May a trust be named as beneficiary of a Roth IRA?

What is a Qualified Plan?

What happens if a Qualified Plan does not have a designated beneficiary?

May a trust be named as beneficiary of a Qualified Account?

How do I plan for a large IRA?

Why do retirement plans usually have a standalone trust separate from a revocable living trust?

Why are IRAs not placed in a revocable living trust?





Q: What is a Plan Administrator or Plan Custodian?

A Plan Administrator or Plan Custodian is the financial institution, often a brokerage firm, that administers the retirement plan for the owner.


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Q: What is a Designated Beneficiary?

A Designated Beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after the owner dies. Beneficiaries of a Traditional IRA must include in their gross income any taxable distributions they receive. A trust cannot be a designated beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met.


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Q: What is a Beneficiary Designation form?

The Beneficiary Designation Form is used by the plan owner to designate the beneficiary of the plan if the owner dies.


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Q: What is a Required Minimum Distribution (RMD)?

The RMD, also called Minimum Required Distributions (MRD), represents the minimum amount that must be distributed from a retirement plan in certain situations, for instance if a Traditional IRA owner has turned 70 ½ and therefore must begin taking distributions. Failing to take an RMD results in stiff penalties, including the 50 percent excess accumulation penalty.


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Q: What is the "IRA Account Balance"?

The IRA Account Balance is the amount in the IRA at the end of the year preceding the year for which the Required Minimum Distribution is being figured.  For determining the Required Minimum Distribution for a year, you divide the IRA account balance as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy.


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Q: What is the Required Beginning Date (RBD)?

The Required Beginning Date is the date you must start receiving distributions from an IRA.  You must start receiving distributions by April 1 of the year following the year in which you reach age 70 1/2.


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Q: What is a Stretch IRA?

A Stretch IRA refers to a beneficiary’s ability to extend, or stretch out, the timeline for taking Required Minimum Distributions from a retirement plan. This defers taxes and results in greater account growth.


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Q: What tax penalties can be assessed against retirement plans

There are four penalties associated with retirement plans: (1) a 10 percent penalty imposed on distributions taken before the owner turns 59 ½, with certain exceptions; (2) a 50 percent penalty imposed for excess accumulations, where the owner fails to withdraw the Minimum Required Distribution; (3) a 6 percent penalty imposed on excess contributions to an IRA; and (4) a prohibited transaction penalty that disqualifies an IRA and thus makes the account subject to income taxes immediately. Prohibited transactions include borrowing money from the plan, selling property to the plan, receiving unreasonable compensation for managing plan assets, using the plan as security for a loan, and buying property for personal use with plan assets, among others.


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Q: Can retirement plan assets be moved to another plan administrator?

Retirement Plan assets may be transferred, tax free, to a Traditional IRA or a Roth IRA, subject to certain restrictions. Transfers are typically from one Plan Administrator to another Plan Administrator, a rollover of assets from one retirement plan to another, or a transfer incident to a divorce.


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Q: What is a Traditional IRA?

A Traditional IRA is usually a tax-deferred retirement plan, meaning that funds deposited to the plan and account earnings are income-tax deferred (pre-tax funds) until plan funds are distributed. Traditional IRAs are any IRA that is not a Roth IRA or a SIMPLE IRA, and include Simplified Employee Pension (SEP) Plans. Contributions to a Traditional IRA are deductible for income tax purposes, but distributions must begin annually after the owner turns 70 ½ years of age, at which time income taxes are assessed.


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Q: What happens if a Traditional IRA account does not have a designated beneficiary?

When a Traditional IRA does not have a Designated Beneficiary, or the beneficiary fails to qualify as a Designated Beneficiary, the result depends on whether the owner died before the owner’s Required Beginning Date (RBD) or after. If before, the entire plan balance must be distributed not later than December 31st of the calendar year containing the fifth year anniversary of the original owner’s death. If the owner died after their RBD, then the plan must make Required Minimum Distributions (RMD) based on the decedent’s anticipated life expectancy (contained in life expectancy tables developed by the IRS) had the decedent not died.


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Q: What happens if the spouse is named as beneficiary of an IRA?

A surviving spouse may elect to: (1) cash the plan out and pay income taxes now; (2) elect inherited IRA treatment; (3) elect rollover of account treatment and make the IRA their own; or (4) disclaim the IRA and have it pass to the next listed beneficiary. There are important tax and income ramifications to each approach.


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Q: May a trust be named as a beneficiary of a Traditional IRA?

A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement plan.


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Q: What is a Roth IRA?

A Roth IRA is a type of IRA where contributions are made after income taxes have been deducted. Because income taxes were removed before a Roth IRA deposit was made, distributions from a Roth IRA account are not subject to income taxes. An additional benefit of Roth IRAs is that there are never Required Minimum Distributions during the life of the original plan owner, and thus the plan may grow substantially and become a sizable inheritance for the Designated Beneficiaries.


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Q: What happens if a Roth IRA account does not have a designated beneficiary?

If a Roth IRA plan does not have a beneficiary and therefore ends up in the decedent’s probate estate, or the beneficiary fails to qualify as a Designated Beneficiary, the result is that the account must be paid out by December 31st of the calendar year containing the fifth year anniversary of the plan owner’s death.


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Q: May a trust be named as beneficiary of a Roth IRA?

A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured, and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement plan.


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Q: What is a Qualified Plan?

A Qualified Plan is an alternative to IRAs, established by employers for their employees. Qualified Plans include Pension Plans, Profit Sharing Plans, 401(k) Plans, and 403(b) Plans. These plans are created under different laws than IRAs, and thus have different regulations governing them, as well as different features and benefits. Qualified Plans are often chosen by employers because employers receive a tax deduction for contributing to the plan, and like Traditional IRAs, employees do not pay income taxes on Qualified Plan contributions or earnings. Rather, Qualified Plans are taxed when distributions are made to the employee.


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Q: What happens if a Qualified Plan does not have a designated beneficiary?

When a Qualified Plan does not have a Designated Beneficiary, or the beneficiary fails to qualify as a Designated Beneficiary, the result is similar to a Traditional IRA. If the plan owner died before the owner’s Required Beginning Date (RBD), the entire plan balance must be distributed not later than December 31st of the calendar year containing the fifth year anniversary of the owner’s death. If the owner died after their RBD, then the plan must make Required Minimum Distributions (RMD) based on the decedent’s anticipated life expectancy (contained in life expectancy tables developed by the IRS) had the decedent not died.


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Q: May a trust be named as beneficiary of a Qualified Account?

A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured, and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement account.


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Q: How do I plan for a large IRA?

Options for handling IRAs and other retirement plan assets have expanded in recent years. It is now possible for your spouse and your children to inherit an IRA and use their own life expectancy to establish the required minimum distribution (RMD) schedule. A child’s ability to use their own life expectancy is critically important, because that allows the child to “stretch out” the RMDs as long as possible, while obtaining the favorable tax treatment for the account.

Planning for a spouse or child to inherit an IRA is relatively easy. You simply update the beneficiary designations on the account and check them every few years to ensure they remain current with your wishes.

There are potential downsides to allowing a young adult to inherit an IRA. Although no hard evidence exist, it is believed that approximately 70 percent of young adults who receive an inherited IRA cash it out within 18 months. What could be a perfect retirement plan for the son or daughter if they removed only the RMDs annually is instead “found money” and wasted, as is the tax-advantaged compounding of plan assets.

A better option for many IRA owners, typically those with accounts above $200,000 in value, is to set up a trust that IRA distributions must pass through. By having a Trustee in place, the beneficiary is unable to withdraw more than the RMD unless the Trustee agrees. If the beneficiary is young, the account usually grows faster than the RMDs exhaust it, so your son or daughter could have a sizable account when they retire.

See the NEET article: Making the Most of Your Retirement Accounts on the Articles Page.


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Q: Why do retirement plans usually have a standalone trust separate from a revocable living trust?

It is not essential, but most estate planners recommend having a separate trust for retirement plan assets. There are several reasons. First, there are strict requirements for a retirement plan trust that are inapplicable to revocable living trusts (RLT), and trying to merge the two makes the RLT much less flexible than it otherwise can be. Second, advanced IRA trusts can function as accumulation trusts, meaning that they receive annual Required Minimum Distributions (RMD) but do not distribute them to the beneficiary. This could become important if the beneficiary is receiving government benefits and the IRA proceeds would offset those benefits. Third, standalone IRA trusts very clearly state that they meet the requirements of being an IRA trust up front, so the IRA custodian, who must receive a copy of the trust, can quickly determine that the trust is a valid IRA trust. This also prevents the IRA custodian from having a copy of your complete RLT. Fourth, a standalone IRA trust alerts beneficiaries to the fact that IRA assets must be handled differently from most other assets, and thus the beneficiary is less likely to withdraw the account assets and waste the tax-advantaged benefits of the keeping the IRA intact as long as possible.


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Q: Why are IRAs not placed in a revocable living trust?

Traditional IRAs and Roth IRAs are not placed in revocable living trusts because if the account owner transferred title of the account to the name of the trust, the IRS would view that as a distribution. In the case of a traditional IRA, the distribution would generate income taxes and possibly penalties for early withdrawals. In the case of a Roth IRA, retitling would likely destroy the tax-advantaged features of the account, and could lead to early withdrawal penalties. IRAs and other tax-advantaged retirement plans generally are never transferred to revocable trusts, although a trust may be named as a contingent beneficiary, typically after one’s spouse and children.


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