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By Joe Cicchinelli and Beverly DeVeny
This week's Slott Report Mailbag answers several questions about IRA trust procedures and another (a very popular one) on the timing for taking required minimum distributions (RMDs) once you turn age 70 ½. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
It appears that in the first year of mandatory RMD withdrawals that one has to take two distributions, one in April of the year after you turn age 70 ½ and by December 31 of the same year. Does it make sense to take the first withdrawal in the year you turn age 70 ½ and take the second one by December 31 of the following year? This may avoid being in a higher tax bracket when two disbursements occur in the same year.
You do not have to take two distributions in the first year of mandatory withdrawals. Your first RMD is due for the year you turn age 70 ½. You may defer that first withdrawal and take it by April 1 (not in April) of the year following the year you turn age 70 ½. That is an option, not a requirement. As you note, it will create double taxation in the second year if you defer the first distribution.
An estate planning attorney set up my Revocable Trust, poured over the will and other estate planning documents after reviewing my financials. Approximately 60% of my financial assets are in IRAs (mutual funds and two annuities with death benefits). I have all other assets titled in my trust, including real estate and non-retirement investments, with specific beneficiary designations.
My attorney is insisting that the primary beneficiary for my IRAs be my Revocable Trust. When I asked if there were any tax consequences to doing so, she said no.
It is not my intent to have my IRA assets go to my husband, because he has more than adequate assets of his own. My goal is to have my assets continue to be managed for growth up to 10 years after my demise, and then be distributed to my stated heirs.
Am I wrong to name my Revocable Trust as my primary beneficiary for my IRA contracts? What are the consequences?
Norma M. from New Hampshire
Answer:Norma from New Hampshire - There is no allowance in the tax code for you to have your retirement accounts grow for a period of time after your death and be distributed at a later date. If the assets go to your spouse then required minimum distributions will begin at either your age 70 ½ or his age 70 ½ depending on whether he keeps them in an inherited account or moves them to his own account. If the assets go to a non-spouse beneficiary, then there are required distributions beginning in the year after your death. If the trust is the beneficiary of your retirement assets, then distributions will have to begin in the year after your death.
There is no tax benefit that can be gained with a trust that cannot be gained without one. Therefore, you would only use trusts for personal (non-tax) reasons (i.e., to control how the funds are distributed after your death and to whom). You must decide whether a trust as the beneficiary of your IRA is the right move for you.
Is there a form that the trustee of the IRA should send to the IRS to show that the money was replaced? I have received a 1099-R and the tax program won’t let me put the whole amount in as a contribution. I am very frustrated and do not want to pay the taxes on this money that I did not have in use.
Answer:Assuming you took a distribution from your IRA and within 60 days rolled the entire amount back to an IRA, then you should not be putting it on your tax return as a contribution. It is a rollover. The tax software should give you prompts on how to do this.
You will have a 1099-R from the IRA that made the distribution, which is issued in January. In May, you will receive IRS Form 5498 from the IRA that received the funds. It will offset the 1099-R. If you have problems with your tax program, contact their help line or consult with a tax professional.