Splitting Inherited IRAs before Year's End

If you or others were the beneficiaries of an inherited IRA whose owner died in 2011, December 31, 2012 is an important deadline.

Tax law requires a non-spouse beneficiary of an inherited IRA who wishes to spread distributions from the IRA over his or her lifetime to begin taking distributions from an inherited IRA account by the end of the year after the year of the IRA owner's death. These distributions are based upon the life expectancy of the beneficiary and are called required minimum distributions (RMDs).

Example - Leslie is the beneficiary of her father's IRA account. Her father, Thomas, passed away in 2011. If Leslie wishes to defer taking distributions from her inherited IRA over her remaining lifetime, she must begin taking RMDs by December 31, 2012.

However, where there are multiple beneficiaries, the life expectancy used to determine the RMDs from the IRA is based upon the age of the oldest beneficiary. Thus, younger beneficiaries would be required to take their RMDs over a shorter period of time than their life expectancy would otherwise require.

Example - Assume that Leslie, from our previous example, whose life expectancy is 32.3 years using the single life table that the IRS provides, has a younger brother, Robert, who is a co-beneficiary of their father's IRA account. Based on his age, and from the single life table, Robert's life expectancy is 42.7 years. However, Robert must use the shorter distribution period of his older sister because the distributions are from their father's IRA account and the RMDs must be based on Leslie's life expectancy of 32.3 years.

This oldest beneficiary rule can be overcome by splitting the inherited IRA into multiple IRA accounts, equally divided among the beneficiaries, before December 31 of the year following the year of the IRA owner's death. Where an IRA is divided into separate accounts (i.e., subaccounts), the RMD rules separately apply to each separate account, effective for years after the year in which the separate accounts were created or the IRA owner's date of death, if later.

Example - If Leslie and Robert, from our prior example, split the IRA into separate accounts prior to December 31, 2012, each can base his or her RMDs on his or her own life expectancy (32.3 years for Leslie and 42.7 years for Robert) and once the accounts are split, make his or her own investment decisions.

Additionally, a separate accounting must allocate all post-death investment gains and losses for the period before the separate accounts were established on a pro rata basis in a reasonable and consistent manner among the separate accounts. However, once the separate accounts are actually established, each beneficiary can make his or her own investment decisions from that point on.

If you have questions related to this RMD requirement, please give this office a call.

2009 Tax Strategy III – Types of Retirement Plans

This is my third posting of a daily tax tip about Traditional IRAs. An IRA can be a good vehicle not only to save taxes, but also to save for retirement. With Traditional IRAs, taxability of income is delayed to future years, normally when one retires.

Traditionally it has been assumed that the tax rates will be lower in the future, especially upon retirement. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. The Taxpayer, with consultation with his/her CPA, should develop a philosophy on this and if it is determined that tax rates will increase in the future, a strategy of speeding up the taxability of income. Please feel free to call me if you have any questions.

Traditional IRAs

(1) Contribution Limit for 2009:
(a) Under Age 50: $5,000
(b) Age 50 to 70 1/2: $6,000
(c) If Taxpayer is an Active Participant, the contributions are phased out at Modified AGI:
 Single: $55,000 to $65,000
 Married Filling Joint [Each spouse if both participating – See (d) bellow)]: $89,000 - $109,000
 Married Filling Joint [With one participating – See (d) bellow)]: $166,0000 to $176,000
 Head of Household: $89,000 to 109,000
 Married Filling Separate: $0.00 to $10,000
 Delta Amount: Single $10,000 / Married $20,000
 Formula: [(“Delta Amt” – “AGI over threshold”)/”Delta Amt”] X Maximum

(d) Definition of Active Participant: When the Taxpayer or his/her spouse is participating in one of the following:
 Qualified Annuity Plan
 Tax-Sheltered Annuity
 Simplified Employee Pension (SEP)
 Government or Tax Exempt Origination Plan [special rule exempt members of the Armed Forces Reserves and Volunteer Firefighters]

(e) Definition of Modified AGI: AGI [Line 37 on 1040] added back
 Saving Bond Proceeds
 Adoption Expense
 Student Loan Interest Deduction
 Higher Education Expense
 Foreign Tax Deduction

(f) Victimized Employees Can contribute additional $3,000
 Victimized employee is -- the Employer matching of the 401(k) was in Employers stock and the Employer either filed bankruptcy or was indicted
(g) Contributions to be made by 4-15-2009
(h) Taxpayers who where in combat has 3 years to make the contribution

(2) Spousal IRA
(a) A spouse who has lower income or none can deduct the full amount of an IRA deduction using the other spouse income