Year-End IRA Checklist


by Bradford N. Dewan, J.D., MBA

With the end of the year 2016 fast approaching, it is important to note that December 31, 2016 is the deadline for certain actions to be taken either by an IRA owner or the beneficiary of that IRA, depending upon whether the IRA owner passed away during 2015 or 2016.

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, 2016) or they will be subject to a 50% penalty on any part of the RMD that was not taken. The main exception to this RMD requirement is that the owners of Roth IRAs are not required to take RMDs after turning 70 ½ years old. The calculation for determining the 2016 RMD is based on the account balance of the IRA on December 31, 2015. An IRA owner will then use the Uniform Lifetime Table to determine his or her “Distribution Period” in 2016 based on his or her age in 2016. 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 2015, the beneficiary will use the Single Life Table to determine his or her Life Expectancy in 2016. In each succeeding year, this Life Expectancy is reduced by one and that number is used to calculate the RMD in that year.

Taking RMDs From One Or More IRAs To Satisfy The RMD Requirement. After an owner of more than one IRA has totaled up the calculated RMDs from each of the IRAs, the owner can take the total RMD that is owed for 2016 from any combination of IRA accounts he or she wishes, including taking the RMD from just one of the IRAs if there is a big enough balance in that IRA. Distributions from other types of retirement accounts cannot offset the IRA owner’s IRA RMD requirement for 2016.

Year of Death RMDs. RMDs must be taken for IRA owners who died in 2016 but didn’t take the full RMD before death. The remainder of the RMD must be taken and reported as income by the beneficiary of that IRA. Thus it is important to emphasize that it is not the estate of the deceased IRA owner 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 estate of the deceased IRA owner 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 IRAs in 2015 have until December 31, 2016 to split the IRA of the deceased owner into separate accounts so that each beneficiary can use his or her own life expectancy to calculate the RMD for 2016 and each succeeding year. Thus each share of the IRA of the deceased owner must be transferred into a separate and properly titled “inherited IRA” by December 31, 2016. 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, 2016. 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 2015 can be split into separate “inherited IRAs” after December 31, 2016, but the beneficiaries will have to use the life expectancy of the oldest beneficiary to determine the RMDs in 2016 and each succeeding year. This can be very detrimental to the youngest beneficiaries since they will be denied the opportunity to maximize the stretch out of the RMDs over their own respective life expectancies.

The funding of “inherited IRAs” can only be done by “trustee-to-trustee” transfers since rollovers are prohibited with respect to inherited IRAs. Thus, if a beneficiary wanted to have the inherited IRA with a custodian different from the custodian holding the decedent’s IRA, then the beneficiary must open the inherited IRA with the preferred custodian and then direct the custodian of the decedent’s IRA to transfer the funds directly to the preferred custodian. However, the custodian of the decedent’s IRA may first require the beneficiary to open an inherited IRA with such custodian before being willing to do the “trustee-to-trustee” transfer to the inherited IRA with the preferred custodian.

2015 Qualified Plan Beneficiaries. Beneficiaries who inherit assets from qualified plans (“Plans”) are generally subject to the Plan’s (often restrictive) rules. An exception allowing Plan beneficiaries to escape the Plan’s rules and secure a maximum stretch out from an inherited IRA is available for those who directly transfer inherited Plan funds to an inherited IRA (or convert directly to an inherited Roth IRA) and take their first RMD by December 31st of the year following the year of death. Beneficiaries who inherited Plan assets in 2015 only have until December 31, 2016 to complete the transfer to an inherited IRA and to take their first RMD in order to avoid being bound and potentially significantly limited by the Plan rules.

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, IRA owners often have copies of beneficiary designation forms that they think are on file with the IRA custodian. It is quite important to check with the IRA custodian to confirm what beneficiary designation form is actually on file with the custodian.

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