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IRA Planning Alternatives

Tax laws relating to the individual retirement account (IRA) distribution rules are among the most complex provisions in the tax code. Therefore, many people don't understand the alternatives and elections available to them. This is an unfortunate situation because IRAs can cause a significant tax burden as they are subject to both federal income and estate taxes. The purpose of this article is to answer some of the most frequently asked questions relating to IRAs.

See FindLaw's Tips for Retirement Planning section and Retirement Plan Glossary for related information.

Q: When must I begin taking distributions from my IRA?

Generally, no later than April 1 of the calendar year following the year in which you become 70. This date is referred to as the "required beginning date."

Q: How much must I withdraw annually after I reach my required beginning date?

You are required to receive "minimum required distributions" each year. The minimum required distributions usually take the form of distributions over your life expectancy (or over the joint life expectancies of you and your Designated Beneficiary).

Q: How is my life expectancy determined?

This is generally determined at your required beginning date. Each year after your required beginning date, your life expectancy will decrease by one full year. However, you may recalculate your life expectancies annually. If you elect to do so, your life expectancy will change each year based on the IRS actuarial tables. It will provide you with a longer payout period during your lifetime, thereby allowing you to defer your income tax by receiving lower minimum required distributions each year.

The disadvantage is that your life expectancy will be zero for the calendar year after your death, thereby requiring the Designated Beneficiary to withdraw the assets over his or her lifetime only (and not your combined joint lifetimes). The election to recalculate must be irrevocably made by the required beginning date.

Q: What is a Designated Beneficiary?

An individual, a group of individuals, and certain trusts. Your estate or a charity is not a Designated Beneficiary.

Q: Why is it important that I name a Designated Beneficiary?

If you don't name a Designated Beneficiary as the beneficiary of your IRA:

  1. After your required beginning date you will be required to withdraw your IRA over your own life expectancy (and not the joint life expectancy of you and your Designated Beneficiary);
  2. If you die before your required beginning date, all IRA assets must be distributed within five years; and
  3. If you die after your required beginning date, all IRA assets must be distributed over your remaining life expectancy (or immediately if you elected to recalculate).

Q: What happens if I die before my required beginning date?

Generally, all benefits will have to be distributed within five years from your date of death. However, if you have named a Designated Beneficiary, the proceeds may be distributed over the that person's life expectancy as of your year of death. Also, if you name your spouse as your Designated Beneficiary, your spouse may roll over your benefits into his or her own IRA in order to postpone distributions and defer income taxes until the spouse's required beginning date.

Q: What happens if I die after my required beginning date?

Your benefits must be distributed at least as rapidly as the method of distribution on the date of your death. Accordingly, if you elected to receive payments over a joint life expectancy, payments can continue to the Designated Beneficiary in the same manner as they were being distributed before your death.

Q: Are there any special concerns if I name my child or children as my Designated Beneficiary?

Yes. First, if you name more than one Designated Beneficiary, the payout period is computed using the life expectancy of the oldest beneficiary, unless each beneficiary is a beneficiary of a separate account or separate share. Second, if a child or other person who is not your spouse is named as your Designated Beneficiary, his or her age is limited to 10 years less than your age for purposes of determining the minimum required distributions during your lifetime. This is called the minimum incidental benefit rule.

Q: Can I change my Designated Beneficiary?

Yes, you can always change your Designated Beneficiary.

Q: Can I name a charity or charitable remainder trust as the beneficiary of my IRA?


Q: What are the consequences if I name a charity as the beneficiary of my IRA?

Assume that Mrs. Smith is charitably inclined and owns $1 million worth of marketable securities and a $1 million IRA. She has several children to whom she would like to leave $1 million, and would like to leave $1 million to her favorite charity. Mrs. Smith should leave the IRA to the charity and the remaining assets to her children. This is beneficial because the charity will pay no income tax on the receipt of the IRA because it is tax-exempt.

Q: What are the consequences of naming a charitable remainder trust as the beneficiary of my IRA?

If you designate a charitable remainder trust as the beneficiary of your IRA, such trust would not recognize income when it received the IRA because it is a tax-exempt entity. You would specify that another individual would receive an income interest in the trust assets for his or her life, at the end of which the property would pass to charity.

You would receive an estate tax charitable deduction based upon the value of the remainder interest passing to charity (the deduction is based on various factors, including the age of the individual receiving the income interest, the interest rate in effect, and the percentage payout to the beneficiary). The end result is that the entire IRA has basically escaped income tax and the remainder interest of the IRA is no longer included in your estate for estate tax purposes.

Q: Can I gift my IRA to charity during my lifetime?

No, IRA's are not assignable during your lifetime.

Q: How can I leave my IRA to my spouse but also require that upon her death the IRA go to my children?

You should consider naming a "QTIP Trust" as the beneficiary of your IRA, which can qualify as a Designated Beneficiary so long as various rules are followed. In addition, the IRA can qualify for the Federal estate tax marital deduction so long as the trust contains certain provisions. Your spouse, however, would not be allowed to roll-over the IRA in order to postpone distributions and defer income.

Q: How can I utilize my IRA to fund my Credit Shelter Trust?

So long as various rules are complied with, you can designate your credit shelter trust as the beneficiary of your IRA. A more flexible solution would be to designate your spouse as the Designated Beneficiary of your IRA, and your credit shelter trust as the contingent beneficiary. Your spouse (with the help of an attorney) could then analyze his or her needs and the current income and estate tax laws at the time of your death to determine whether it would be more appropriate to roll-over your IRA and defer income.

Each situation may require different planning strategies and should be examined carefully with a professional who has expertise in this area of the law. See FindLaw's directory of estate planning lawyers to find a professional near you.

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