Financial Advisor to clergy and religious educators 

IRA Strategies
In a recent private letter ruling, the IRS says that a person inheriting a nonspouseís IRA, can choose their own beneficiary for the account. Previously, the IRA, which would have terminated at the nonspouseís death, could have triggered an expensive tax bill for the heir. The method of handling non-spouse inheritance of IRAs was never clear in the tax code. As a result, many retirement-industry firms refused to allow beneficiaries from naming beneficiaries. 

In the absence of guidance from the IRS, decisions are often left up to the IRA custodian, and policies often vary among custodians. For example, letís assume that Dale Braxton dies at age 69 with $1.3 million in his IRA and had named his 35 year old son, Bruce, as beneficiary. Assuming the IRA earns a modest 7% per year, Bruce can pull out more than $2 million over the next 25 years and still have more than $3.5 million in the account. Thatís in theory how an IRA stretch-out works. But because of the previous vagueness of the IRA rules, some IRA custodians wonít let IRA beneficiaries name their own beneficiaries. (If the IRA is retitled in the name of a nonspouse, distributions will be accelerated.) At the first beneficiaryís death, the IRA terminates and all the remaining funds in the IRA are distributed with income taxes due. When Bruce inherited the IRA, he had a life expectancy of 35 years. If Bruce died 25 years later, his son, the new beneficiary, may be allowed to spread out the distributions over the last ten years. Itís up to the IRA custodian Ė some custodians say that beneficiary rights are covered by state law, which can be very complex. 

Some custodians will require that an IRA balance be distributed at the ownerís death if a marital trust is named as the beneficiary. In some trusts, the payout may not be distributed to the beneficiary right away. The income would then be trapped in the trust, taxable at high trust income tax rates. 

Often, insurance companies that are custodians for 403(b) plans, permit beneficiaries only two options: a lump-sum distribution, which could generate a large tax bill, or annuitization, which locks in a payment stream without access to the principal. A nonspouse beneficiary is permitted to take minimum withdrawals over his or her life expectancy, but custodians arenít required to offer it. A solution would be to find a custodian that will permit a stretch-out, and execute a tax-free rollover to the other custodian. Some custodians may not permit an IRA beneficiary to create separate IRAs, one per successor beneficiary, even though that will provide more flexibility and slow the pace of taxable withdrawals. Separate accounts can make a substantial difference if thereís a large difference in the ages of the beneficiaries. Often, an IRA custodianís form does not have enough room to detail your wishes regarding beneficiaries. A solution to this would be to have a customized beneficiary form drawn up. As you approach age 70 ½ and the required mandatory distribution, itís a good idea to reiterate your distribution and beneficiary instructions, via certified, return receipt letter, to you IRA custodian. Once minimum distributions begin, you should check closely on the calculations Ė over one third of IRA providers make mistakes with these calculations.

Dresner Financial Planning Dresner@clergyplanning.com
2359 Salisbury Road Westbury, NY 11590
(888) 200-9670
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