Year-End IRA Checklist

 

 

By Bradford N. Dewan, JD, MBA

With the end of 2015 fast approaching, it is important to note that December 31, 2015 is the deadline for certain actions to be taken by an IRA owner or the beneficiary of that IRA if the owner passed away during 2014 or 2015.

Required Minimum Distributions. Most retirement account owners and beneficiaries (including Roth IRA beneficiaries) subject to required minimum distributions (“RMDs”) must take the RMDs before year end (i.e. December 31, 2015) or they will be subject to a 50% penalty on any part of the RMD that was not taken. The main exceptions to this RMD requirement are the owners of Roth IRAs who are not required to take RMDs after turning 70 ½ years old. The calculation for determining the 2015 RMD is based on the IRA’s account balance on December 31, 2014. An IRA owner will then use the Uniform Lifetime Table to determine his or her Distribution Period in 2015 based on his or her age in 2015. For an IRA owner, the Distribution Period is recalculated each year under the Uniform Lifetime Table. In contrast, for a beneficiary of an IRA, he or she will determine his or her Life Expectancy under the Single Life Table in the year after the year of the IRA owner’s death. In subsequent years, there is no recalculation of the Life Expectancy. Rather, the Life Expectancy, once determined, is simply reduced by one in each subsequent year. Thus, if the IRA owner died in 2014, the beneficiary will use the Single Life Table to determine his or her Life Expectancy in 2015. In each succeeding year, this Life Expectancy is reduced by one, and that number is used to calculate the RMD in that year.

Year of Death RMDs. RMDs must be taken for IRA owners who died in 2015 but who didn’t take the full RMD before their death. The remainder of the RMD must be taken and reported as income by the IRA’s beneficiaries. Thus, it is important to emphasize that it is not the deceased IRA owner’s estate that must receive and report the balance of the RMD, but rather the individuals and/or entities listed as the beneficiaries on the beneficiary designation form. However, the deceased IRA owner’s estate may end up being the beneficiary if (1) all the individuals listed on the beneficiary designation form predeceased the IRA owner, or (2) the IRA owner failed to file a beneficiary designation form with the IRA custodian and the custodial agreement lists the estate of the IRA owner as the default beneficiary.

Splitting IRAs Into Separate Accounts. Beneficiaries who inherited an IRA in 2014 have until December 31, 2015 to split the inherited IRA into separate accounts so that each beneficiary can use their own life expectancy to calculate the RMD for 2015 and each succeeding year. This “separate account” rule is very important when there is a significant difference in the ages of the beneficiaries. The IRA of the owner who died in 2014 can be split into separate inherited IRAs after December 31, 2015, but the beneficiaries will have to use the life expectancy of the oldest beneficiary to determine the RMDs in 2015 and each succeeding year. This can be detrimental to the youngest beneficiaries since they will be denied the opportunity to maximize the stretch out of the RMDs over their respective life expectancies. Thus, each share of the IRA must be transferred into a separate and properly titled inherited IRA by December 31, 2015. Importantly, as noted above, the beneficiary of each such separate inherited IRA must also take the RMD from the newly created inherited IRA by December 31, 2015.

2014 Qualified Plan Beneficiaries. Beneficiaries who inherit assets from qualified plans (“Plans”) are generally subject to the Plans’ (often restrictive) rules. However, Plan beneficiaries can escape these rules and secure a maximum stretch out from an inherited IRA by directly transferring inherited Plan funds to an inherited IRA (or converting directly to an inherited Roth IRA) and taking their first RMD both by December 31st of the year following the year of death. So in order to avoid being bound and potentially significantly limited by the Plan rules, beneficiaries that inherited Plan assets in 2014 only have until December 31, 2015 to complete the transfer to an inherited IRA and to take their first RMD.

Check Beneficiary Forms. A lot can change in a year, such as marriage, divorce, birth or death. When these types of life events occur, beneficiary designation forms need to be reviewed and likely updated to clearly reflect the IRA owner’s desires. While a beneficiary designation form review is not required by year end, it is a great time for IRA owners (and their advisors) to make sure their existing beneficiary designation forms still reflect their wishes. In addition, while IRA owners often have copies of beneficiary designation forms that they believe to be on file with the IRA custodian, it is also important to check with the IRA custodian to confirm what beneficiary designation form is actually on file.

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