My mother didn’t take a penny out of her account until required to at age 70. Isn’t that the age when a RMD is required??
70.5 and then you have until April of the following year. But I was going by memory. I will do more research and write things down for my kids to know what to do. In case my memory is gone and I don’t remember things anymore.
RMD bases on the total of your retirement money. For round number, let say you have 1 million, you need to divide that to roughly 24 or whatever the number in the IRS table and that’s what you have to withdraw. You can’t avoid RMD for non-Roth IRA or non-Roth 401k, you can make the balance smaller when you’re 70.5 by withdrawing some amount before you’re 70.5 and your RMD will be less. At least that’s my understanding. I know my brother thought his 401k is safe from RMD but I told him otherwise.
Whenever you make a withdrawal from your nondeductible retirement account, you will have to include the amount in your taxes, whether its a rmd or a withdrawal for any other reason or at any time. You just don’t have a penalty if you’re at least 59.5 or withdraw for permitted purpose.
I assume those that have non- deductible IRA have converted to Roth IRA, if not why not. I know I did. I didn’t one to have 3 different types of IRA in my estate. I want to simplify things for my kids.
My issue with Vanguard was wanting them to recognize Durable Power of Attorney. It’s much easier to get Fidelity to recognize it and their form even states Durable Power of Attorney in bold, large font at the top of their form.
Is that the same as Power of Attorney?
What’s the difference if it’s not.
Durable power of attorney lasts until the person who granted it revokes it or dies. It is effective from the day it is fully executed by all parties and accepted by the custodian. It doesn’t require annual renewals, proof of continued agreement by any of the parties or any other actions. Different custodians of funds have their own forms and requirements. So far, we are most impressed with Fidelity’s, of the 3 brokerages where we have investments.
The IRS publication that addresses distributions from IRAs and Required Minimum Distributions is:
Publication 590-B (2014)
http://www.irs.gov/publications/p590b/ch01.html#en_US_2014_publink1000230701
There are 3 Tables in the Appendices that set forth the life-expectancy divisors. Each table applies to a different category of IRA owner or beneficiary as applicable.
The general rule is that Roth IRAs are governed by the same rules as traditional IRAs (both pre- and post-tax IRAs) UNLESS there is a specific rule that pertains only to Roths (this is the key point).
All IRAs: make sure you have properly designated primary and secondary beneficiary(ies) at the custodian of your account. Otherwise, there is little to nothing your executor can do after your passing. IRA accounts do not pass via your will. They descend by way of the terms of the contract with the custodian financial institution.
Generally, there are two classes of beneficiaries:
(1) spouse: gets to treat the inherited IRA as his/her own
(2) non-spouse: cannot treat the inherited IRA as his/her own, but receives distributions as a beneficiary
– the account will be titled like this
Sally Smith
as beneficiary (BENEF) of Grandpa Smith (deceased)
The schedule of RMDs required to be distributed to Sally Smith will depend on whether Grandpa Smith was already age 70.5 and taking his RMDs when he died. Pub 590-B has all of that information.
Inform your beneficiaries or leave clear notes in your account files that they must contact the custodian financial institution to understand that there are special steps and deadlines they must follow to keep the inherited IRA intact. “You cannot squeeze toothpaste back into the tube” if a mistake is made. All distributions from traditional IRAs = taxable Ordinary Income.
Charles Schwab has a pretty good clickable guide to the different classes of IRA beneficiaries and the different rules to which each class is subject.
IMO, the ideal result for an inherited “Stretch” IRA is for your beneficiary-descendants (children or grandchildren) to each get an Inherited IRA that distributes RMDs based on their respective life expectancies. The process is relatively straightforward and simple but the key is to have your designations of beneficiaries set up properly in the first place and then review them periodically as life circumstances change. Keep or print a copy of your beneficiary designations and retain among your estate planning documents.
Elsewhere on CC I have mentioned that I dealt with 5 different financial institutions in settling my ILs’ IRAs. (Why they had their IRAs at 5 different institutions is not for me to judge, but I would not go into old age with that much complication.) MIL also had a 401k at her old employer she did not rollover to an IRA.
I can say that Vanguard and Fidelity were great to deal with. Vanguard was the most accommodating to our unusual and difficult circumstances and helped me get the results I wanted. Janus was OK. Merrill Lynch was essentially represented by the FIL’s former broker rather than the corporate office; he was helpful like a family friend. Putnam was the nightmare company: gave conflicting advice and then disallowed the steps we took according to the last extensive consultation with their representative, then refused to acknowledge its mistake and wouldn’t reverse itself. After significant research, my estate counsel and I managed to take steps to transfer the IRA from Putnam to Vanguard, which then allowed me to take the steps that I wanted.
It is in your interest if you are not confident about the ability of your present 401k/IRA custodian to handle things to make inquiries in anticipation of safeguarding the inheritance of your 401k/IRA accounts.
Edited to add: I will say that even though my H participated in the settling of all of his parents’ accounts because he is their executor, H still is unclear about how inherited IRAs work. I attribute that in part to the fact that he was just tangentially involved, but part of it is also because the rules are complex. It is only with hands-on experience that I have learned as much as I have. I plan to sit our D down to make sure she knows. Right now, all I have done is tell her that IRAs are “special beasts” and should anything happen to both of us, she needs to consult with experts before she can proceed with them.
Amend that to include all 401K, roth or non-Roth. Our 401k guy told us there’s no RMD with Roth 401k when we were contemplating to sign up for Roth 401k. Reading IRA publications closely, I realized he was misinformed. With Roth 401k, one doesn’t pay tax on withdrawal but you still have to take RMD unlike Roth IRA.
Thanks for clarifying a lot of things, I’m getting closer to retirement and I’m starting to pay more attention to the specifics. I know I’m now more sure that transferring from my 401k to IRA is the way to go because I maybe able to stretch the IRA if it’s in RMD. While with 401k I can not. I just need to make sure beneficiaries are correct.
Another question I have if the IRA can be stretched base on the kids life expectancy, does it even make sense to convert the IRA to Roth IRA even. Any thoughts on this?
How do the beneficiaries get notification when the IRA account owner dies? The IRS allows only 2 months for the beneficiaries to act. Is it too short?
Cool weather. Our beneficiaries are out kids. And they already know they are the beneficiaries of these accounts.
Seems to me they will know when one of us dies! :). And I less than two months!
There are many reasons to rollover an employer QRP to an IRA at the financial institution of your choice once you retire. IMO foremost among them are:
(1) your ability to choose the underlying mutual funds or other investments for your QRP balance over the ones provided by your employer plan, and
(2) your ability to make sure that your estate planning can be accommodated by the custodian / trustee of your QRP.
For example, if you choose to designate a trust as one of your beneficiaries, I suspect that it will be far more likely that you can get that accomplished correctly at a Vanguard or Fidelity rather than having to get HR to record it properly. It’s not impossible, but it’s an added layer of bureaucracy that may result in problems.
Likewise if one of your beneficiaries prefers to disclaim for any reason so that the IRA can descend to another beneficiary: in my experience with MIL’s 401k account, there was never that option because of the limitations imposed by the relative lack of knowledge of the custodian and its inability to go beyond the terms of the Summary Plan Description.
@AttorneyMother, I choose not to designate my trust as my beneficiary but my kids are my beneficiaries. From the tax or all other point of views, if there are any, what advantage and disadvantage does it have to have the trust as a beneficiary. I just want to keep it simple and only has non retirement account in my trust. I did the trust mostly for the real estates that my husband and I own because it has no beneficiary form.
I don’t have the citation handy (at Dr appt), but your beneficiaries have until Sept of the year following the owner’s death to finalize the IRA’s descent. It’s all in Pub 590-B.
The relative long period of time is what allowed me to go a total of 4 rounds of documents with Putnam before finally getting the decedent IRA to Vanguard, which allowed me to accomplish the result I want.
Your beneficiary(ies) are the ones who’d notify the custodian, or your executor.
@thump1 I know. I know. And the kids will fight with each other too.
The reasons one would designate a trust as a beneficiary for a QRP account or IRA are generally the same as the reasons one would put one’s assets into trust for an heir. Chief among them are:
(1) the beneficiary is a minor
(2) the beneficiary is too young to be responsible for managing a large sum of money
– remember that RMDs are just the minimum amount required to be withdrawn annually. Depending on when your child(ren) receives ownership of (for example) a 7-figure IRA when she is 21, 25, or 40, she would possess different ability or understanding about the management and spending of it.
(3) there is a special needs child
(4) to keep the distributions from the child’s spouse or creditors
(5) to keep the IRA out of the child’s estate (for child’s estate tax issues)
There are others, I sure, that are dependent on your own situation. This is where you’d consult with your estate planning attorney. The drafting of the IRA designation language is important if you are going to depart significantly from the usual:
(1) to spouse, then
(2) to child or children (per capita or per stirpes)
(3) to charity
Most companies only allow two layers of beneficiaries, so that is a complication.
As for the tax issues, it is a complex question beyond what I want to discuss here, because there are different ways a trust can be used in this context. Here is a good recent article by Michael Kitces that will raise questions only you can answer for yourself:
If your Post #6536 is a likely problem, it is all the more incentive for you to take steps to ensure that the IRA is divided according to your designations, and then each child will get his/her separate inherited IRA to do with as he/she wishes.
Child 1 can let it stretch for a lifetime
Child 2 can take it all out at once, pay tax on OI and buy a boat and sail around the world while the money lasts
@AttorneyMother, thank you very much. I did talk to an estate trust attorney when we set up a trust. He did mentioned some of the points in your post. At the time, I only want to deal with my real estate. I haven’t done half of the things he suggested but still on the fence about them. I do have the two year maintenance fee that I pay to add or remove things. I’m still mulling what to do.
If you have a 401(k) and are still working at age 70.5, you are not required to start RMDs at that time (unless you are a “key employee” i.e, an owner, in a small business). Government plans are not covered by ERISA and may have different rules.
OTOH, if you are still working after 70.5 and delaying taking RMDs, that will make your RMD higher later on, since the distribution rates are based on life expectancy. Most of my clients just took them at 70.5 no matter what so there weren’t any problems.
The 50% excise tax for failing to take RMDs is nasty, nasty, nasty to seniors. There aren’t many other tax errors that get hit with penalties like that.