What Options Does an Estate Have as IRA Beneficiary?
By Beverly DeVeny and Jeffrey Levine
This week's Slott Report Mailbag dives into details on SIMPLE IRAs and SEP IRAs, explains the legality of having a 401(k) versus a Roth 401(k) and walks a questioner through the options an estate has as an IRA beneficiary. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.
What are the limitations of combining Traditional IRA accounts with SIMPLE IRA accounts with a rollover? Also, what are the comparable legal advantages between a regular 401(k) account and a Roth 401(k) account?
In December, 2015, The PATH (Protecting Americans from Tax Hikes) Act became law. It now allows SIMPLE IRAs to accept rollovers from other types of retirement plans two years after the first funds have been deposited into the SIMPLE IRA. After the two-year period, the SIMPLE funds can also be rolled out of the SIMPLE to another type of retirement plan. The advantages and disadvantages will depend on the types of plan to which the SIMPLE IRA funds are rolled. The overall advantage when you consolidate accounts is ease of keeping track of balances and investments.
In general, there’s not much of a legal advantage to having 401(k) funds as opposed to Roth 401(k) funds. Your contributions to a Roth 401(k) will be after-tax so you will increase your taxable income for the year of the deferral. Earnings will be distributed on an after-tax basis after the Roth 401(k) has been established for more than five years.
As a self-employed business owner without employees, I am planning on establishing and funding a new SEP IRA by April 15 for 2015. Under the language and examples in IRS Publication 590 on “Are You covered by an Employer Plan?”, I think the answer is that I can’t do it for 2015. If so, can I deduct traditional IRA contributions already made in 2015 and also deduct the new SEP amount?
Fidelity Investments retirement staff said YES I can. Will showing both deductions trigger an IRS audit?
An interesting planning tool if allowed.
The ability to deduct an IRA contribution is a two-part test. The first is income based and the second is whether or not you or your spouse is covered by an employer plan. Many individuals covered by an employer plan are able to deduct their IRA contributions. The following chart has the limits for the current year, 2016.
Phase-Out Ranges for IRA Deductibility
This chart is only for those who are covered by a company retirement plan.
Year Married/Joint Single/Head of Household
2014 96,000 - 116,000 60,000 - 70,000
2015 98,000 - 118,000 61,000 - 71,000
2016 98,000 - 118,000 61,000 - 71,000
If you are not covered by a company plan, but the spouse is, the phase-out range for 2015 is $183,000-$193,000 and for 2016 is $184,000-$194,000. If filing married-separate, the phase-out range is $0-$10,000.
From the examples in IRS Publication 590, it sounds as though you are not covered by a plan for 2015. Just be aware that IRS publications cannot be relied on. If they are incorrect, you foot the bill for any additional taxes and penalties.
I can tell you with certainty, however, that making a contribution to your SEP IRA now for 2015 will actually make you an active participant in a company plan for 2016 and NOT for 2015.
Our question has to do with what options does the estate have as an IRA beneficiary? Since the deceased didn’t name a beneficiary, then the estate became the beneficiary by default, correct? Are these the options of the estate going forward?
- The estate has to pay out the entire IRA within 5 years of death.
- The estate can maintain the IRA, however, the estate has to remain open as long as the IRA is not distributed from the estate, and the estate can make RMDs from the inherited IRA account.
Would appreciate any insight you have, I do enjoy your blog.
The answer to your question depends on the age of the IRA owner at death. Assuming the IRA document defaults to the estate, you have the following possible scenarios:
- Death before the required beginning date (RBD - 4/1 of the year after turning age 70 ½) – The five-year rule will apply. The IRA will have to pay out to the estate within five years after the date of death.
- Death after the RBD – Distributions can be made over the remaining life expectancy of the IRA owner had he lived.
An inherited IRA would need to be set up in the name of the decedent for the benefit of the estate. When the estate is closed, the IRA custodian could transfer the inherited IRA into inherited IRA accounts for the beneficiaries of the estate.
All of the above is what the tax code allows. An IRA custodian is not required to offer those options. You will be limited by what the IRA agreement allows for an estate beneficiary.