Ameriprise Financial Inherited IRAs · Most inherited assets such as bank accounts, stocks, and...

Ameriprise FinancialFjosne & Associates

Grant R. Fjosne, ChFC®, CRPC®,CFS®, APMA®

Private Wealth Advisor1907 Wayzata Blvd. East

Suite 350Wayzata, MN 55391

[email protected]

Inherited IRAs

April 02, 2019

Grant R. Fjosne, ChFC®, CRPC®, CFS®

Qualifications:

-Named Five Star Wealth Manager: Mpls./St. Paul & Twin Cities Business Magazines

-Chartered Financial Consultant

-Bachelor of Science Degree

-Chartered Retirement Planning Counselor

-Accredited Portfolio Management Advisor

-Series 7 Securities License

-Series 66 Securities License

-Certified Fund Specialist

-Life/Health Insurance License

Specialties:

Investment Management

Financial Planning

Retirement Distribution Strategies

401(k) & IRA Consulting

Business Retirement Plans

Stock Options

Education Plans

Estate Planning Strategies

Charitable Giving and Family Trusts

Licensed and registered to conduct business in AZ, CA, CO, GA, HI, IL, IN, KS, MN, MO, NC,NJ, NE, OK, PA, SC, TX, VA, WI

of 23, see disclaimer on final page

Table of ContentsChoosing a Beneficiary for Your IRA or 401(k) ......................................................................................................4

What are my options if I inherit an IRA or an employer retirement savings plan account? ................................... 6

Lump-Sum Distribution from Inherited IRAs and Retirement Plans .......................................................................8

What is a "stretch" IRA? ........................................................................................................................................ 10

Withdraw the Entire Amount of an Inherited IRA or Retirement Plan within Five Years (Five-Year Rule) ............ 11

Withdraw from an Inherited IRA or Retirement Plan Using the Life Expectancy Method ...................................... 14

Disclaiming All or Part of an Inherited IRA or Retirement Plan ..............................................................................17

Child, Grandchild, or Other Individual as Beneficiary of Traditional IRA or Retirement Plan ................................ 20

April 02, 2019 of 23, see disclaimer on final page

Choosing a Beneficiary for Your IRA or 401(k)

April 02, 2019

Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. Withretirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries.Although taxes shouldn't be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead youto make an incorrect choice.

In addition, if you're married, beneficiary designations may affect the size of minimum required distributions to you from your IRAsand retirement plans while you're alive.

Paying income tax on most retirement distributionsMost inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due.However, that's not usually the case with 401(k) plans and IRAs.

Beneficiaries pay ordinary income tax on distributions from pretax 401(k) accounts and traditional IRAs. With Roth IRAs and Roth401(k) accounts, however, your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met.That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.

For example, if one of your children inherits $100,000 cash from you and another child receives your pretax 401(k) account worth$100,000, they aren't receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to incometax at ordinary income tax rates, while the cash isn't subject to income tax when it passes to your child upon your death.

Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, thebottom line is different for each of them.

Naming or changing beneficiariesWhen you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries.Changes are made in the same way--you complete a new beneficiary designation form. A will or trust does not override yourbeneficiary designation form. However, spouses may have special rights under federal or state law.

It's a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form toreflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal adviceas needed.

Designating primary and secondary beneficiaries


April 02, 2019

When it comes to beneficiary designation forms, you want to avoid gaps. If you don't have a named beneficiary who survives you,your estate may end up as the beneficiary, which is not always the best result.

Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as yourprimary beneficiary. If your primary beneficiary doesn't survive you or decides to decline the benefits (the tax term for this is adisclaimer), then your secondary (or "contingent") beneficiaries receive the benefits.

Having multiple beneficiariesYou can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary willreceive (the shares do not have to be equal). You should also state who will receive the proceeds should a beneficiary not surviveyou.

In some cases, you'll want to designate a different beneficiary for each account or have one account divided into subaccounts(with a beneficiary for each subaccount). You'd do this to allow each beneficiary to use his or her own life expectancy incalculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for yourbeneficiaries in paying income tax on distributions.

Avoiding gaps or naming your estate as a beneficiaryThere are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets aretransferred from someone who has died to the heirs or beneficiaries entitled to those assets.

First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may endup as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.

If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost.In addition, probate can mean paying attorney's and executor's fees and delaying the distribution of benefits.

Naming your spouse as a beneficiaryWhen it comes to taxes, your spouse is usually the best choice for a primary beneficiary.

A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling overyour 401(k) or IRA to his or her IRA or plan, a surviving spouse can generally decide to treat your IRA as his or her own IRA.These options can provide more tax and planning options.

If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxabledistributions to you from retirement assets while you're alive. This can allow more assets to stay in the retirement account longerand delay the payment of income tax on distributions.

Although naming a surviving spouse can produce the best income tax result, that isn't necessarily the case with death taxes. Atyour death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased(note: special tax rules and requirements apply for a surviving spouse who is not a U.S. citizen). If your spouse's taxable estate forfederal tax purposes at his or her death exceeds the applicable exclusion amount, then federal death tax may be due. In otherwords, one possible downside to naming your spouse as the primary beneficiary is that it may increase the size of your spouse'sestate for death tax purposes, which in turn may result in death tax or increased death tax when your spouse dies.

Naming other individuals as beneficiariesYou may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates thatyour surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective writtenwaiver. And if you live in one of the community property states, your spouse may have rights related to your IRA regardless ofwhether he or she is named as the primary beneficiary.

Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspousebeneficiary can directly roll over all or part of your 401(k) benefits to an inherited IRA.

Naming a trust as a beneficiaryYou must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legaladvice before designating a trust as a beneficiary.

Naming a charity as a beneficiaryIn general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However,after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of thenoncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.


What are my options if I inherit an IRA or an employerretirement savings plan account?

April 02, 2019

If you don't want the money, you can always disclaim (refuse to accept) the inherited IRA or plan funds. But if you're like mostpeople, you will want the money. Your first thought may be to take a lump-sum distribution, but that's usually not the best idea.Although a lump sum provides you with cash to meet expenses or invest elsewhere, it can also result in a huge income tax bill (inmost cases, due all in one year). A lump-sum distribution also removes the funds from a tax-deferred environment. Fortunately,you probably have other alternatives.

If you are the designated beneficiary (i.e., you are named as beneficiary in the IRA or plan documents), you can take distributionsover your remaining life expectancy, which spreads the income and tax liability over a number of years. You must calculate theannual required minimum distribution (RMD) amount that must be withdrawn each year using IRS life expectancy tables. (You canalways withdraw more than the minimum amount in any year, but you will generally be subject to a 50% tax penalty on anyrequired amount that is not withdrawn.) Yearly distributions from the IRA or plan must begin by December 31 of the year followingthe year of the original account owner's death. If there are other designated beneficiaries and separate accounts have not beenset up, the oldest beneficiary must be used for the life expectancy calculation. (Note: An employer-sponsored retirement plan canspecify the distribution method that beneficiaries must use.)

You may have other options as well. If the IRA owner or plan participant died before he or she began taking RMDs, you cangenerally elect to distribute the entire interest in the IRA or plan within five years of the owner's or participant's death. (In this case,you don't have to begin taking distributions the year after death.) If the IRA owner or plan participant died after beginning to takeRMDs, you may be able to spread distributions over the owner's remaining life expectancy (calculated in the year of death) if thatperiod is longer than your own life expectancy. (Be sure to first withdraw the RMD for the year of death, if not yet taken by the IRAowner/plan participant.) Again, keep in mind that an employer-sponsored retirement plan can specify the distribution method thatbeneficiaries must use. If your choices are limited by a plan, you may have the ability to transfer the plan funds to an IRAestablished in the deceased IRA owner's or plan participant's name — the rules that apply to inherited IRAs would apply to thetransferred funds.

If you are a surviving spouse and a designated beneficiary of the IRA or plan you may also have additional options. You can rollover inherited traditional IRA or plan funds into your own traditional IRA or retirement plan. If you're the sole beneficiary, you canalso leave the funds in an inherited IRA and treat it as your own IRA. In either case, you can then name beneficiaries of yourchoice and defer taking distributions until the required age (usually 70½). You can generally also roll over ("convert") non-Rothdistributions from an employer plan into a Roth IRA (you'll generally pay tax on the converted funds in the year of the conversion,but qualified distributions from the Roth IRA will be tax free).


April 02, 2019

If you're a nonspouse beneficiary, you generally have far fewer options. For example, you can't roll the funds in an employerretirement plan into your own IRA or plan account, but you can generally have the funds transferred directly to a properly titledinherited IRA (for example, Joy Smith, deceased, for the benefit of Mary Smith, beneficiary). You can also roll over ("convert")non-Roth distributions from an employer plan into an inherited Roth IRA (however, you must do so in a direct rollover, and pay taxon the converted funds).

Finally, Roth IRAs are subject to similar rules. If you inherit a Roth IRA, you can take distributions over a five-year period(following the Roth IRA owner's death) or over your remaining life expectancy. Although original Roth IRA owners are not subjectto RMDs, Roth IRA beneficiaries must take them. However, if you are a surviving spouse beneficiary, you may be able roll theassets over to your own Roth IRA or, if you're the sole beneficiary, treat the Roth IRA as your own. This is significant because, asa Roth IRA owner (rather than beneficiary) you do not have to take any distributions from the Roth IRA during your lifetime.Distributions from an inherited Roth IRA are usually free from income tax if made at least five years after the deceased IRA ownerfirst contributed to any Roth IRA.

Caution: You cannot roll over RMDs. When evaluating whether to initiate a rollover always be sure to (1) ask about possiblesurrender charges that may be imposed by both the distributing plan and the receiving plan, (2) compare investment fees andexpenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand anyaccumulated rights or guarantees that you may be giving up by transferring funds out of an employer plan. The rules governinginherited IRAs and employer-sponsored plan accounts are complex. Consult a tax advisor for more information.


Lump-Sum Distribution from Inherited IRAs andRetirement Plans

April 02, 2019

What is it?A lump-sum distribution is the withdrawal of the entire balance of an inherited traditional IRA or employer-sponsored retirementplan account in one tax year. It is this one-tax-year time frame, not the number of distributions, that determines a lump-sumdistribution. A lump-sum distribution can take the form of a single distribution, or multiple distributions taken over the course of thetax year. This distribution option is generally available to you when you inherit a traditional IRA, and may be available to you whenyou inherit a retirement plan account (if the terms of the plan allow it). If you are not the sole primary beneficiary of the IRA or plan,the lump-sum distribution option will apply separately to your share of the inherited funds.

As an IRA or retirement plan beneficiary, you will generally be subject to federal (and possibly state) income tax on a lump-sumdistribution for the tax year in which it is taken (to the extent that the distribution represents pretax or tax-deductible contributions,and investment earnings). For this and other reasons, a lump-sum distribution is generally not regarded as the best way todistribute funds from an inherited IRA or plan. Other options for taking post-death distributions will typically provide more favorabletax treatment and other advantages.

Caution: This discussion does not apply to Roth IRAs or Roth 401(k), 403(b), and 457(b) accounts. You can take a lump-sumdistribution from an inherited Roth IRA, or an inherited Roth 401(k)/403(b)/457(b) account, but since qualified distributions fromthese plans are tax free (and nonqualified distributions are taxable only to the extent earnings are distributed), the considerationsare quite different.

Requirements to take a lump-sum distributionTo be eligible to take a lump-sum distribution from a deceased IRA owner's or plan participant's account, you obviously must be abeneficiary of that account. Being a beneficiary of an IRA or retirement plan account generally means that you are designated byname as a primary beneficiary in the IRA or plan documents. You could also become a primary beneficiary of the IRA or plan ifyou are named as a secondary beneficiary (also known as a contingent beneficiary), and one or more of the original primarybeneficiaries disclaims (i.e., refuses to accept) the inherited funds or predeceases the account owner.

In the case of a retirement plan account, you can only take a lump-sum distribution of the inherited funds if the plan offers thisdistribution option. Most plans do permit account beneficiaries to take lump-sum distributions, but you should check with the planadministrator to make certain.

Advantages of taking a lump-sum distributionYou receive all of the funds nowThe main attraction of taking a lump-sum distribution from an inherited IRA or retirement plan is that you receive a sum of moneyin one tax year to use for your own benefit. The amount that you ultimately receive could be substantial depending on the size ofthe account, your share of the funds, and the portion that is lost to taxes. Once the funds are distributed to you, you generallyhave complete discretion over their use. You could use the money to pay your medical bills, finance your children's education, orfund the down payment on a home, or for any other purpose.

Special tax treatment may be availableWith inherited retirement plan accounts, another potential advantage of taking a lump-sum distribution is that such distributionsmay be eligible for special income averaging treatment (if you were born before 1936). This can reduce the income tax liability onthe inherited funds, but the availability of this special treatment is limited. In addition, special capital gains rules may apply to aportion of a lump-sum distribution attributable to pre-1974 plan participation. Special rules may apply to lump-sum distributionsthat include employer securities.

In many cases, the drawbacks of taking a lump-sum distribution from an inherited IRA or retirement plan will outweigh theperceived advantages.


April 02, 2019

Disadvantages of taking a lump-sum distributionThere may be adverse income tax consequencesAs noted, when you take a lump-sum distribution of your inherited IRA or plan funds, you receive all of the funds in one tax year.This distribution must be reported as taxable income on your federal income tax return for that year. (If there were evernondeductible or after-tax contributions made to the account, a portion of the distribution would not be taxable.) Depending on thesize of the distribution and your federal income tax bracket, the portion of the funds that is lost to taxes may be substantial. Thismay be especially true if the distribution pushes you into a higher income tax bracket, causing the funds to be taxed at a higherrate.

Caution: To make matters worse, your lump-sum distribution may be subject to state income tax as well as federal income tax.You should check the laws of your state for information regarding the tax treatment of IRA and retirement plan distributions.

If you want to minimize income taxes on the inherited IRA or plan funds, a lump-sum distribution is probably not the appropriatedistribution option. Other methods of taking post-death distributions from the IRA or plan may be available, and will typicallyprovide more favorable tax treatment.

The distributed funds will miss out on tax-deferred growth opportunitiesAnother major drawback to taking a lump-sum distribution from an inherited IRA or retirement plan is the loss of tax-deferredgrowth opportunities. When you take a lump-sum distribution, you are removing all of the IRA or plan funds from a tax-deferredenvironment. You may take the money from a lump-sum distribution (what is left of it after taxes) and invest it elsewhere, but theearnings will generally be subject to tax. Even if you immediately reinvest your lump-sum distribution in another tax-deferredvehicle, such as an annuity, you will still have to pay tax on the distribution itself.

How to take a lump-sum distribution• Contact the plan administrator to confirm that a lump-sum distribution is an option.• Consult a professional advisor: Before taking a lump-sum distribution from an inherited IRA or plan, speak to a tax advisor or

other professional regarding your distribution options and the tax and estate planning considerations. Your advisor should beable to tell you whether a lump-sum distribution is appropriate in your case. In many cases, it will not be.

• Contact the IRA custodian or plan administrator: If you decide to take a lump-sum distribution, you will need to contact theIRA custodian or the plan administrator to request the necessary form for withdrawal. Return the form along with anynecessary documentation (such as personal identification and/or a death certificate), indicating that you want to receive alump-sum distribution.

• Report the distribution on your tax return: You must enter the taxable amount of your lump-sum distribution on your federalincome tax return for the year of the distribution. Remember, not all of the distribution will be taxable if part of it representsnondeductible or after-tax contributions. Determine whether special averaging or other special tax treatment is available.


What is a "stretch" IRA?

April 02, 2019

Finding a method to leave a lasting legacy to your loved ones without increasing their tax burdens can be difficult andcomplicated. A "stretch" IRA may be a useful approach that can benefit your heirs for generations to come.

A stretch IRA is not a special type of IRA but rather a term frequently used to describe this IRA strategy, also known as a"multigenerational" IRA, that can be used to extend the tax-deferred savings on inherited IRA assets for one or more generationsto benefit future beneficiaries.

Here's how it works. You let the funds accumulate in the IRA for as long as possible. You name as beneficiary someone younger,perhaps a son or daughter. When you have to start taking required minimum distributions (RMDs) from your traditional IRA afterturning age 70½, you take only the minimum annual amount required by the IRS each year. (If you fail to take a minimumdistribution, you could be subject to a 50% income tax penalty on the amount that should have been withdrawn.)

When your beneficiary inherits your IRA, he or she might also have the ability to take required minimum distributions (RMDs)based on his or her life expectancy. (RMDs are calculated each year and must begin no later than December 31 of the yearfollowing your death.) In this way, your beneficiary would have the potential to stretch the distributions over his or her own lifetime,which enables the funds to continue compounding tax deferred for a longer period and avoids a large initial tax bill. Yourbeneficiary can also name a beneficiary, who can potentially stretch the distributions even longer.

There is a limit to how long you can "stretch" an IRA. The IRS doesn't want to postpone taxes indefinitely. The distribution periodcannot extend beyond the first-generation beneficiary's life expectancy. For example, if you designated your son to be the solebeneficiary of your IRA and he was 40 when you died (and you hadn't yet reached the age for taking RMDs), he could take RMDsbased on his 37.6-year life expectancy, starting the year after you died. If he died 20 years later, his designated beneficiary couldcontinue taking minimum distributions based on what would have been your son's remaining life expectancy (20.8 years).

Of course, nonspouse beneficiaries of IRAs face some hurdles. There are different sets of rules to determine the RMDs that anonspouse beneficiary must receive. They depend on whether the original account owner died before, on, or after reaching therequired beginning date for RMDs. Not only are these rules complex, but they can have far-reaching implications. Spousalbeneficiaries of IRAs have more options than nonspouse beneficiaries.

If you have a desire to extend your financial legacy over future generations and don't need the IRA assets for income during yourlifetime, then this strategy may be appropriate for you. Because many tax and distribution rules must be followed, make sure toseek legal or tax counsel before making any final decisions.


Withdraw the Entire Amount of an Inherited IRA orRetirement Plan within Five Years (Five-Year Rule)

April 02, 2019

What is it?The five-year rule is a method of taking post-death required minimum distributions from an IRA or an employer-sponsoredretirement plan account. Under this method, the IRA or plan beneficiary must receive the entire balance of the inherited accountwithin a five-year period. The five-year period ends on December 31 of the calendar year that contains the fifth anniversary of theIRA owner's or plan participant's death. For example, if a participant died on January 1, 2018, the entire interest must bedistributed by December 31, 2023. Distributions may be taken in any amount and at any time within the five years. However, if anyfunds remain in the IRA or plan after the five-year period has passed, those funds will generally be subject to a 50% federalpenalty tax.

Tip: Employer-sponsored retirement plans that are subject to the required minimum distribution rules are qualified plans (including401(k), profit-sharing, stock bonus, and defined benefit plans), 403(b) plans, 457(b) plans, SEPs, and SIMPLE plans.

When does the five-year rule apply?IRS regulations provide that the five-year rule is the default method of payout when there is no designated beneficiary, and theaccount owner's death occurs before his or her required beginning date. If the IRA owner or plan participant dies with one or moredesignated beneficiaries (i.e., individuals named as beneficiaries), or on or after the required beginning date, the default method ofpayout is instead the life expectancy method. However, there are additional situations in which the five-year rule may apply:

1. The IRA or retirement plan requires you to use the five-year rule. Even though the life expectancy method is the defaultpayout method when the IRA owner or plan participant names an individual as designated beneficiary, the terms of the IRAor plan may be less liberal than the law allows, and may require that you take post-death distributions under the five-yearrule if the IRA owner or plan participant dies before his or her required beginning date. Consult the IRA custodian/trustee orplan administrator regarding your post-death options.

2. You fail to start installments under the life expectancy method on a timely basis. If you want to take post-death distributionsusing the life expectancy payout method, the distributions generally must begin no later than December 31 of the yearfollowing the year of the IRA owner's or plan participant's death. If the distributions do not begin on or before that date, thefive-year rule becomes the default method of payout, and you are no longer allowed to use the life expectancy method.

3. You choose to use the five-year rule. An IRA or retirement plan may allow the designated beneficiary to elect to use eitherthe life expectancy method or the five-year rule.

Why choose the five-year rule?In most cases it will not be in your best interest to take distributions from an inherited IRA or plan under the five-year rule. That isbecause other post-death distribution options are usually available, and these options often provide greater tax benefits and otheradvantages. For example, if the life expectancy method is the default payout method (or available as an alternative), this methodwill typically allow post-death distributions to be taken over a longer period than the five-year rule. This will also likely be the caseif you are a surviving spouse beneficiary, and you are able to roll over the inherited funds to your own IRA. A longer payout periodis beneficial because it maximizes the funds' tax-deferred growth potential, and spreads out your income tax liability on thosefunds over more years.

By contrast, under the five-year rule, the maximum possible payout period for post-death distributions will be five years. Takingyour post-death distributions over a five-year period could result in a significant income tax liability for some or all of those fiveyears. This is particularly true if you are in a high income tax bracket and/or there are substantial funds in the inherited IRA orplan. Finally, a five-year payout period does not allow much time for the inherited funds to continue growing tax deferred.

However, there are certain situations in which it may make sense to take post-death distributions using the five-year rule.Consider the following scenario.

Example(s): Elaine wants to buy a house in four years. She has recently inherited a traditional IRA from her friend Cal. She couldwithdraw the entire balance of the IRA now, pay applicable taxes on the distribution, and use the funds to buy the house in fouryears. But this would cause her to lose a large portion of the funds to taxes. Elaine could also take post-death distributions over


April 02, 2019

her life expectancy, but then she would have to take annual distributions for four years before withdrawing the balance to buy ahouse. Under the five-year rule, Elaine can keep all of the money in the inherited IRA until she needs it to buy a house in fouryears. In the meantime, the funds will continue to grow tax deferred in the IRA. In this case, the flexibility to take distributions inany amount and at any time within the five-year period is well suited to Elaine's needs.

How to do itAs an IRA or retirement plan beneficiary, you will need to contact the IRA custodian or plan administrator to determine youroptions and to request the necessary form for distribution. Return the form along with any required documentation (such asidentification and a death certificate), indicating that you want to take post-death distributions under the five-year rule. Keep inmind that this may be the default method of payout in some cases.

Nonspouse rollover from an employer plan to an inherited IRA —The Pension Protection Act of 2006A spouse beneficiary can roll over death benefits received from an employer-sponsored retirement plan to either the spouse's ownIRA, or to an IRA established in the deceased's name with the spouse as beneficiary (an "inherited IRA"). In the past, neither ofthese options was available to nonspouse beneficiaries. While nonspouse beneficiaries still cannot roll over inherited funds froman employer plan to their own IRA, the Pension Protection Act of 2006 lets nonspouse beneficiaries make direct(trustee-to-trustee) rollovers from qualified plans (including 401(k)s), 403(b), and governmental 457(b) plans to inherited IRAs. If anonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of thedistribution.

The ability to make a rollover to an IRA is significant because employer plans often require faster payouts to nonspousebeneficiaries than the law requires, accelerating taxation for these individuals. IRAs on the other hand generally allow distributionsto be spread over the maximum period permitted by law, permitting tax deferral for the longest period of time. The IRS hasprovided guidance on nonspouse rollovers from employer sponsored plans to IRAs in IRS Notice 2007-7. The Notice providesthat:

• The IRA must be established in a manner that identifies it as an inherited IRA, and also identifies the deceased employeeand the beneficiary, for example, "Tom Smith as beneficiary of John Smith."

• An indirect rollover — where the beneficiary receives the distribution and then rolls the funds over to an IRA within 60 days — isnot allowed.

• A plan can make a direct rollover to an IRA on behalf of a trust where the trust is the deceased employee's namedbeneficiary, provided the beneficiaries of the trust can be treated as designated beneficiaries under IRS required minimumdistribution (RMD) rules, and the trust is identified as the IRA beneficiary.

• The nonspouse beneficiary can't roll over RMDs to the inherited IRA.

The Notice provides complex rules for determining both the RMDs ineligible for rollover from the employer plan, and the RMDsrequired from the IRA after the rollover:

1. The employee dies before his or her required beginning date, and the five-year rule applies. Under the five-year rule, no amounthas to be distributed by the retirement plan to the beneficiary until the end of the fifth calendar year following the year of theemployee's death. In that year, the entire remaining amount that the beneficiary is entitled to under the plan must be distributed.Notice 2007-7 provides that the beneficiary can directly roll over his or her entire benefit until the end of the fourth year. On or afterJanuary 1 of the fifth year following the year in which the employee died, no amount payable to the beneficiary is eligible forrollover. Most importantly, Notice 2007-7 provides that if the beneficiary was subject to the five-year rule in the employer plan, thefive-year rule will continue to apply to for purposes of determining RMDs from the inherited IRA after the rollover.

However, even where the five-year rule applies, a special rule allows a nonspouse beneficiary to determine the RMD under theemployer plan using the life expectancy rule, roll the balance over to an inherited IRA, and continue to take RMDs from the IRAusing the life expectancy rule — which provides the maximum tax deferral for the beneficiary. To use this special rule the rollovermust occur no later than the end of the year following the year in which the employee dies.

Example(s): Sam, a participant in his employer's 401(k) plan, dies on June 1, 2017. The 401(k) plan provides that beneficiariesmust receive their entire balance from the plan under the five year rule. Therefore June, Sam's beneficiary, must receive the entirebalance no later than December 31, 2022. June would like to defer taxes on her inherited funds for as long as possible. If shemakes a direct rollover to an inherited IRA by December 31, 2018, she will be able to use the life expectancy rule, rather than the


April 02, 2019

five-year rule, when calculating her RMDs from the IRA. Her rollover must be reduced by the amount of RMDs that would havebeen required under the employer plan using the life expectancy rule. If June fails to make her rollover by December 31, 2018,then she will still be able to make a rollover to an inherited IRA (no later than December 31, 2021), but will have to continue to usethe five-year rule when calculating her RMDs from the IRA. That is, she will still be required to receive all the funds in the inheritedIRA no later than December 31, 2022.

2. The employee dies before his or her required beginning date, and the life expectancy rule applies. If the life expectancy ruleapplies, the amount ineligible for rollover includes all undistributed RMDs for the year in which the direct rollover occurs and anyprior year. After the rollover, the life expectancy rule continues to apply in determining RMDs from the inherited IRA. RMDs aredetermined using the same applicable distribution period as would have been used under the employer plan if the direct rolloverhad not occurred.

3. The employee dies on or after his or her required beginning date. If an employee dies on or after his or her required beginningdate, the amount ineligible for rollover includes all undistributed RMDs for the year in which the direct rollover occurs and any prioryear, including years before the employee's death. After the rollover, the life expectancy rule continues to apply in determiningRMDs from the inherited IRA. The RMD under the IRA for any year after the employee's death must be determined using thesame applicable distribution period as would have been used under the employer plan if the direct rollover had not occurred.


Withdraw from an Inherited IRA or Retirement Plan Usingthe Life Expectancy Method

April 02, 2019

What is it?The life expectancy method is a method of taking distributions from an inherited IRA or employer-sponsored retirement planaccount. As the name suggests, it allows you to take post-death distributions based on your life expectancy. Under this method,you must receive a certain minimum amount each year. You can always take larger distributions than required, but if you withdrawless than required in any year, a 50 percent federal penalty tax will apply to the undistributed required amount. The annualrequired distributions are calculated to dispose of the entire balance in the inherited IRA or plan over your remaining lifeexpectancy. The applicable life expectancy is determined according to IRS life expectancy tables.

The main advantage of the life expectancy method is that it typically allows distributions to be taken over a period of many years.In fact, in many cases, this method will result in the longest possible payout period for post-death distributions. As discussedbelow, a longer payout period can provide significant income tax advantages. Obviously, younger beneficiaries will benefit themost from the life expectancy method because their post-death payout periods will reflect their longer life expectancies.

Caution: If an IRA owner or plan participant dies after his or her required beginning date, and there is no designated beneficiary,distributions are generally based on the owner's or participant's remaining life expectancy (calculated in the year of death).

The IRS distribution rulesUnder IRS regulations, the life expectancy method is generally the default payout method for inherited IRAs andemployer-sponsored retirement plans, regardless of when the account owner died, if the account has a designated beneficiary (asdefined below). If there is no designated beneficiary and the owner dies before his or her required beginning date for requiredminimum distributions, then the five-year rule, not the life expectancy method, is used. For the life expectancy method to be used,the distributions generally must begin no later than December 31 of the year following the year in which the IRA owner or planparticipant died. If the distributions do not begin on or before this December 31 date, the life expectancy method can no longer beused.

As mentioned, post-death distributions taken under the life expectancy method will generally be based on the beneficiary'sremaining life expectancy. However, if the IRA owner or plan participant dies on or after his or her required beginning date(generally the April 1 following the year in which he or she reaches age 70½), distributions may be taken over the longer of (1) thedesignated beneficiary's single life expectancy, or (2) the deceased IRA owner's or plan participant's remaining single lifeexpectancy. If the beneficiary's life expectancy is shorter than that of the deceased (according to IRS tables), the second option isdesirable because it allows distributions to be taken over more years. This could be the case, for example, if the beneficiary is aparent or older sibling of the deceased.

Caution: With an inherited retirement plan account, the plan is generally allowed to specify the post-death distribution optionsavailable. These options may or may not be the same as the options permitted under IRS distribution rules. For example, if theplan participant died before his or her required beginning date, the plan may require that the five-year rule be the default payoutmethod, and you may or may not be able to elect an alternate payout method. However, you may be able to make a tax-freerollover of your inherited retirement plan account to an IRA with more flexible distribution provisions.

Caution: Roth IRA owners are not subject to the required minimum distribution rules during their lifetimes. However, inheritedRoth IRAs are subject to the post-death required distribution rules described in this article. Because Roth IRA owners do not havea "required beginning date," the post-death required minimum distribution rules are always applied as if the Roth IRA died beforehis or her required beginning date.

Tip: If the life expectancy method is used, there is one situation in which the distributions may begin later than described above. Ifthe IRA owner or plan participant dies before the required beginning date, and his or her surviving spouse is the sole designatedbeneficiary, the distributions may begin as late as the year that the owner or participant would have reached age 70½ (if later thanDecember 31 of the year following the year of death).

Caution: If an IRA owner or plan participant dies after his or her required beginning date, and there is no designated beneficiary,distributions are generally based on the owner's or participant's remaining life expectancy (calculated in the year of death).


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Only designated beneficiaries can use this methodFor the life expectancy method to be available as a post-death option, the IRA or plan account must have one or more designatedbeneficiaries as of the September 30 next-year date (September 30 of the year following the year of the IRA owner's or planparticipant's death). A designated beneficiary is an individual who is named by you, or specified in the IRA or plan documents, asa beneficiary. It could be a spouse, a child, a grandchild, a parent or other relative, a friend, or any other individual. Any of theseindividuals has a life expectancy that can be used to measure the post-death payout period for purposes of the life expectancymethod.

Obviously, if there are no beneficiaries named on the IRA or plan account, there is no designated beneficiary. In this case, thedecedent's estate becomes the default beneficiary, and post-death distributions generally must be made either according to thefive-year rule (if death occurred prior to the required beginning date) or over the decedent's remaining life expectancy (if deathoccurred after the required beginning date). The same limited options apply if there are any nonindividual beneficiaries named onthe IRA or plan account, such as the decedent's estate or one or more charities. (Special rules apply if a trust is named asbeneficiary.) These types of beneficiaries are not designated beneficiaries and cannot use the life expectancy method.

Caution: If, as of the September 30 next-year date, both individuals and nonindividuals are named as beneficiaries of the IRA orplan account (for example, your child and a charity are each to receive 50 percent), then even the individual beneficiaries (yourchild in the example) will not be able to use the life expectancy method. One way to avoid this result is to have the nonindividualbeneficiary's interest in the account paid out by the September 30 date.

What if there are multiple designated beneficiaries?It is not uncommon for a single IRA or plan account to have more than one individual designated as a primary beneficiary. Thebeneficiary designation form for the account will typically list all of the primary beneficiaries by name, as well as the portion of thefunds that each beneficiary is to receive. Fractional or percentage amounts usually make more sense, since the dollar value of theaccount usually fluctuates with the underlying investments and the separate accounts rules generally won't apply to pecuniary(specific dollar amount) bequests. Further, depending on the IRA owner's or plan participant's instructions, the account may not bedivided equally among the primary beneficiaries.

If the IRA or plan account has multiple designated beneficiaries as of the September 30 next-year date, the life expectancymethod can still be used to take post-death distributions, but special rules apply. The new distribution rules require that in thissituation, the age of the oldest designated beneficiary (i.e., the one with the shortest life expectancy) be used for purposes ofcalculating post-death distributions. This is a potential drawback because the other, younger primary beneficiaries would then besubject to a shorter payout period than they might otherwise have been. For example, if a 45-year-old man and his 30-year-oldsister are equal beneficiaries of their deceased father's IRA, the sister's annual distributions would have to be based on herbrother's life expectancy.

However, there is a way to avoid this outcome. The final distribution rules provide that if an IRA or plan account has multipleprimary beneficiaries, the account may be split into separate accounts. This can generally be done at any time up until December31 of the year following the year of the IRA owner's or plan participant's death (but note that designated beneficiaries aredetermined by September 30 of the year following the participant's death--it may be more prudent to establish separate accountsby September 30 to avoid any problems with the inconsistency of the September 30 and December 31 dates). Each account andits beneficiary would then be treated separately for purposes of calculating required post-death distributions. This can allow ayounger beneficiary to take post-death distributions over his or her own single life expectancy, providing a longer payout periodthan would otherwise be available.

Caution: The rules regarding separate accounts are complex. Consult a tax professional for guidance.

Advantages of the life expectancy methodMay provide the longest payout periodThe life expectancy method generally allows post-death distributions to be taken over a period of years. The actual length of thepost-death payout period will depend on your remaining single life expectancy, according to IRS life expectancy tables. Youngerbeneficiaries obviously have longer life expectancies and will therefore enjoy a longer payout period under the life expectancymethod. In effect, if you are a relatively young beneficiary of an IRA or plan account, you may be able to withdraw the inheritedfunds over a period of many years. In this case, the life expectancy method will usually be your best choice for taking post-death


April 02, 2019

distributions. Even if you are an older beneficiary, this method may provide a longer payout period than other post-death options.

There are two important reasons why it is in your best interest as an IRA or plan beneficiary to have the longest possible payoutperiod. First, it maximizes the growth potential of the funds. The longer funds remain in an IRA or plan, the longer the investmentearnings can grow tax deferred. The other advantage of a long payout period is that it spreads out your income tax liability on theinherited funds. You are able to pay less income tax each year, since the annual distribution amounts are smaller than they mightotherwise be. With a shorter payout period, the larger distributions increase your taxable income each year, possibly even pushingyou into a higher income tax bracket.

Tip: If you are a surviving spouse beneficiary of an IRA or plan account, you can generally use the life expectancy method likeany other designated beneficiary, but this is typically not your only post-death option. Depending on your age and other factors,choosing one of your other options will often be more beneficial to you than using the life expectancy method.

You will receive an income stream and have some flexibilityIf you are an IRA or plan beneficiary, one potential advantage of using the life expectancy method for post-death distributions isthat you will enjoy a steady stream of income. That is because under this method, you will generally be required to take adistribution from the IRA or plan account every year for the rest of your life. (The amount of each required distribution will dependon your life expectancy and the account balance.) You may consider this a drawback if you want to minimize your taxable income,especially if you are already in a high income tax bracket. However, if you need additional income, the predictability of receivingannual IRA or plan distributions may appeal to you. You can use the money to meet your ongoing expenses, fund a largepurchase, or invest elsewhere.

In addition to controlling how the funds are to be used, you have some control over the size of your distributions. Although youcannot withdraw less than the minimum required amount in any year (at least not without being penalized), you are not limited towithdrawing only that amount. You can always take a larger distribution than required in any year, including a lump-sumdistribution of the entire account balance. This gives you some flexibility to tailor your distributions to your changing needs andcircumstances.

Disadvantages of the life expectancy methodIf you are an IRA or plan beneficiary, there are no clear disadvantages to using the life expectancy method for post-deathdistributions. You will have to pay federal (and possibly state) income tax on all or part of each distribution you receive, but this willgenerally be the case with any post-death payout method that you select. However, if you are a surviving spouse, you haveoptions that may provide superior planning opportunities.

How to do it• Contact the IRA trustee or the plan administrator: If an IRA owner or plan participant has died and you are one of the

account beneficiaries, your first step should be to contact the IRA custodian or plan administrator. Find out whether the lifeexpectancy method is an option for you. Get professional advice as to whether it is a good idea to choose this payoutmethod. Assuming that the life expectancy method is available and appropriate for you, find out what you need to do to electthis payout method. You will typically have to complete a distribution form and provide certain documentation (such asidentification and a birth certificate).

• Determine how much you must withdraw: To avoid the federal penalty tax, make sure you know how much you must receivefrom the IRA or plan account under the life expectancy method. You calculate your minimum required distribution for anyyear by dividing the account balance (generally, as of the end of the prior year) by your applicable life expectancy. Todetermine your applicable life expectancy, you will need to refer to the IRS life expectancy tables. To avoid potentially costlymistakes, you may want to have a tax advisor assist you with this process.

• Include the appropriate amount in your taxable income: For every year that you receive a distribution from the IRA or planaccount, determine the taxable portion of the distribution and enter that amount on your federal income tax return. In additionto federal income tax, state income tax may apply, so check your state's tax laws.


Disclaiming All or Part of an Inherited IRA or Retirement Plan

April 02, 2019

What is it?If you are a beneficiary of a traditional IRA or employer-sponsored retirement plan account, and the account owner dies, yougenerally have several options. In most cases, one of your options is to disclaim the inherited funds. When you disclaim all or partof a traditional IRA or retirement plan account, you voluntarily refuse to accept some or all of the inherited funds.

Why would someone disclaim?As you might guess, disclaiming is not common. Most beneficiaries opt to receive the inherited IRA or employer-sponsored planfunds in one form or another. However, disclaiming a benefit may actually make sense in certain circumstances. For example, youmay decide to disclaim so that the funds pass directly to a contingent beneficiary with greater financial need. Or, you may want todisclaim in order to minimize your taxable income or for estate planning purposes. IRA and retirement plan distributions aregenerally treated as taxable income for federal (and possibly state) income tax purposes and can be subject to estate tax, too. Oryou may want to disclaim to allow the IRA or retirement plan account to pass to a younger contingent beneficiary who can stretchout distributions over a longer period of time.

Requirements to make a disclaimerTo disclaim funds from a deceased IRA owner's or plan participant's account, you must have a claim on those funds in the firstplace. In other words, you must be a beneficiary of the IRA or plan account. When you disclaim the account, it passes to thecontingent beneficiary. You may disclaim the entire IRA or retirement plan or just the portion that you do not want, but either way itmust be a "qualified" disclaimer to avoid being classified as a gift from you to the contingent beneficiary for federal gift taxpurposes.

A qualified disclaimer is (1) irrevocable and unconditional, (2) in writing, (3) given to the plan custodian or administrator within ninemonths of the creation of the interest (or, if later, nine months after you turn 21) and before you have access to, or use orenjoyment of, the funds, and (4) causes the IRA or plan to pass directly to the secondary (contingent) beneficiary without youdirecting where it goes.

Tip: In most cases, the nine month period starts on the date of the account owner's death for purposes of disclaiming IRA andretirement plan benefits.

To disclaim inherited IRA or plan funds, you generally must not have selected another payout option for the funds. If you havealready elected to take distributions from the account, you may not later disclaim in most cases. If you are considering disclaimingthe inherited funds, you should seek professional advice before taking any action with respect to the inherited account. Evenexercising investment control over the account could jeopardize a future disclaimer.

Tip: There is one important exception. If the account owner has not taken a required minimum distribution (RMD) for the year ofdeath the IRA or retirement plan beneficiary must take that distribution by December 31 in order to avoid a 50% tax penalty. TheIRS has ruled that taking this RMD will not prevent the beneficiary from making a timely disclaimer of all or part of the remainingIRA or retirement plan benefit (although the beneficiary can not disclaim any earnings attributable to the RMD). This helpful ruling(Rev, Rul. 2005-36) lets a beneficiary take the year-of-death RMD while providing further time to consider whether or not todisclaim the balance of the IRA or retirement plan benefit.

Caution: You can disclaim funds from an inherited Roth IRA as well. However, since qualified distributions from a Roth IRA aretax free, the considerations are slightly different.

Qualified disclaimers, RMDs, and designated beneficiariesIRS regulations establish September 30 of the year following the year of the account owner's death as the date by which thedetermination of designated beneficiaries must be finalized. If you make a qualified disclaimer (as defined above) by thisSeptember 30 date, you will generally not be treated as a designated beneficiary of the IRA or plan for purposes of calculatingpost-death distributions (this is separate from the issue of whether the disclaimer was effective for estate and/or gift tax purposes).


April 02, 2019

Caution: The September 30 date does not operate to extend the deadline for making a qualified disclaimer—that is, a qualifieddisclaimer must generally be made within 9 months after the account owner's death.

Advantages of disclaimingYou will not pay income tax on the disclaimed fundsAs mentioned, post-death distributions from IRAs and retirement plans are generally subject to federal income tax. (If the IRA orplan consists of any nondeductible or after-tax contributions, those amounts are not taxable when distributed.) State income taxmay also apply. However, when you disclaim inherited IRA or plan funds, you pay no income tax on those funds because younever actually receive them. Instead, the party that receives the funds as a result of your disclaimer (usually one or morecontingent beneficiaries) will pay income tax on distributions of those funds.

Disclaiming can thus be a beneficial strategy if you do not need the inherited funds, and one of your goals is to minimize yourtaxable income. This may be especially true if the inherited funds would push you into a higher income tax bracket, causing thefunds to be taxed at a higher rate.

Your estate will not pay estate tax on the disclaimed fundsWith a qualified disclaimer, the disclaimed funds are not part of your estate for gift or estate tax purposes. Depending on theestate tax bracket of your estate, this can result in a significant tax savings.

You can decide how much to disclaimGenerally, if an IRA owner or retirement plan participant dies, and you are a designated beneficiary of the account, you canchoose to disclaim all or a portion of the funds that you inherit. This gives you some flexibility to tailor your decision regardingthose funds to your own needs and situation. You may opt to disclaim your entire share of the inherited funds for tax reasons. Or,you can disclaim a portion of the funds and receive the other portion as distributions.

A disclaimer may benefit others with greater needTypically, if you are a primary beneficiary of the IRA or plan, the portion of the funds that you disclaim will pass to one or morecontingent beneficiaries (assuming there are contingent beneficiaries named in the IRA or plan documents). This may be a verydesirable outcome if the contingent beneficiaries are family members or other loved ones who have greater financial need thanyou. For example, this might be the case if you are the child and primary beneficiary of the account owner, and your children arethe contingent beneficiaries. Allowing the funds to pass to contingent beneficiaries can also be advantageous if those individualsare in a lower income tax bracket than you, and/or if they can take post-death distributions over more years than you would beable to.

Disadvantages of disclaimingYou will not receive the inherited fundsWhen you disclaim inherited IRA or retirement plan funds, the portion that you disclaim typically passes to someone else and isunavailable to you. If you instead accepted the inherited funds, you would have additional money to meet expenses and/or investelsewhere.

If you have already received a distribution, you may not disclaim laterWhen you inherit an IRA or retirement plan, you must make a timely decision about how you want the funds distributed and submitthe appropriate forms to the IRA custodian or plan administrator. If you have had access to, or use or enjoyment of, the funds(typically, this means that you have received one or more distributions, or you have exercised investment control over theaccount), you may not change your mind later and disclaim the funds. Similarly, if you elect to disclaim the inherited funds, youtypically may not decide later that you want to receive distributions instead. Your first decision is generally final, so you shouldcarefully weigh your options and seek professional advice.

Example(s): Rita inherits a traditional IRA from her husband, Nick. She needs money immediately to pay her tuition at the localbeauty school. She takes a large distribution from the inherited IRA and puts it into her checking account. Before she writes the


April 02, 2019

check, she wins a scholarship for tuition and fees. Now Rita would like to disclaim the IRA so that it will go directly to thecontingent beneficiary, her son Ricky. However, it is too late. Having already taken a distribution (and having been given access tothe funds), Rita may not now disclaim the IRA.

Tip: See "Requirements to make a disclaimer," above, for a special rule regarding required minimum distributions.

You may not choose who will receive the assets in your placeIf you elect to disclaim an inherited IRA or retirement plan, the funds typically pass to the contingent beneficiaries. This outcomemay be desirable if you want the contingent beneficiaries to benefit, but that may not be the case. Further, if there are nocontingent beneficiaries (or if they too disclaim), the disclaimed funds will typically pass to the account owner's estate. This isusually not desirable because post-death distribution options will be limited and the funds will have to go through probate beforebeing distributed to the beneficiaries and/or heirs of the estate. Being named as a beneficiary of an IRA or plan does not give youthe power to decide who should receive the inherited funds if you choose to disclaim--that is determined by who is named as thealternate takers on the beneficiary designation form or, if there is a gap in the designations, who the takers are under state law.

How to make a disclaimerYou will need to contact the IRA custodian or plan administrator to request the necessary form for disclaiming either all or part ofthe inherited funds. Unless you expressly disclaim, you are presumed to have accepted the funds. Get legal and tax advice beforesigning a disclaimer. Return the form with any necessary documentation (such as identification and a death certificate), indicatingthat you want to disclaim all or a portion of the balance. Disclaimer forms vary from state to state, so you should consult the IRAcustodian or plan administrator regarding whether you need an attorney to prepare the necessary form. In addition, be sure tomake a qualified disclaimer in a timely manner.

If you disclaim only a portion of the IRA or plan funds, you will need a withdrawal form to indicate how you want to receive theremaining portion. Disclaimers have significant tax and financial consequences--get legal advice before deciding to disclaim. Also,get advice very soon after a death, because actions you take after someone's death may prohibit you from making a qualifyingdisclaimer under the applicable federal and state tax laws.


Child, Grandchild, or Other Individual as Beneficiary ofTraditional IRA or Retirement Plan

April 02, 2019

What is it?Naming a beneficiary for your traditional IRA or employer-sponsored retirement plan may be one of the most important financialdecisions you ever make. The beneficiary (or beneficiaries) you name will receive the funds remaining in your IRA or plan afteryou die, so consider your loved ones' future needs. However, choosing the right beneficiary is often more complicated than that.Your choice could have an impact in one or more of the following areas:

• The size of the annual required minimum distributions (RMDs) that you must take from the IRA or plan during your lifetime• The rate at which the funds must be distributed from the IRA or plan after your death• The combined federal estate tax liability of you and your spouse (assuming you are married and expect estate tax to be an

issue for one or both of you)

If you are married, your first thought may be to name your spouse as the primary beneficiary of your IRA or plan. Naming aspouse is very common because it often makes sense for several reasons . If you are not married, though, you will have toconsider other possible beneficiary choices. (Even if you are married, naming someone other than your spouse may sometimesbe a better beneficiary choice.) Children, grandchildren, other relatives, and close friends are popular beneficiary choices for IRAowners and plan participants. You must look closely at your situation and seek professional advice to make the right choice.

Caution: This discussion applies only to traditional IRAs and employer-sponsored retirement plans. Choosing a beneficiary for afor a Roth IRA involves different considerations.

Caution: Federal law may require that you designate your spouse as the primary beneficiary of your 401(k) or other retirementplan account, unless your spouse signs a timely written waiver allowing you to name a different beneficiary. Also, if you live in acommunity property state, your spouse may have legal rights in your IRA regardless of whether he or she is named as the primarybeneficiary.

Caution: In the case of minor beneficiaries (e.g., young children and grandchildren), it may be in your best interest to establish acustodial account or a special trust to receive the IRA or plan distributions on behalf of the minor. Consult a tax professional fordetails.

Your beneficiary choice usually does not affect required minimumdistributions during your lifeUnder federal law, you must begin taking annual RMDs from your traditional IRA and most employer-sponsored retirement plans(including 401(k)s, 403(b)s, 457(b)s, SEPs, and SIMPLE plans) by April 1 of the calendar year following the calendar year inwhich you reach age 70½ (your "required beginning date"). With employer-sponsored retirement plans, you can delay your firstdistribution from your current employer's plan until April 1 of the calendar year following the calendar year in which you retire if (1)you retire after age 70½, (2) you are still participating in the employer's plan, and (3) you own 5 percent or less of the employer.Your choice of beneficiary generally will not affect the calculation of your RMDs unless your spouse is your sole designatedbeneficiary for the entire distribution year and he or she is more than 10 years younger than you.

Advantages of naming a child, grandchild, or other individualThe funds may be taxed at a lower income tax rate after your deathWhen you take a distribution from your traditional IRA or retirement plan, you generally have to pay federal (and probably state)income tax on all or a portion of it. For federal income tax, distributions are taxed at a certain rate according to your income taxbracket, which depends on your taxable income for the year. After you die, the distributions that your beneficiary must take fromthe IRA or plan will be taxed according to his or her income tax bracket. Choosing a beneficiary who is in a lower income taxbracket than you can reduce taxation of the IRA or plan funds after your death. This is one reason that many people namechildren, grandchildren, and other nonspousal individuals as beneficiaries.

But it may be many years before your beneficiary has to take post-death distributions from your IRA or plan, and his or her tax


April 02, 2019

situation could be drastically different by then. For example, a college student who does not work is probably in a low income taxbracket now, but may be in a much higher bracket 5 or 10 years after graduation. The point is that it can be risky to base yourbeneficiary choice solely on someone's current income tax bracket.

Tip: If you have ever made nondeductible contributions to your traditional IRA or after-tax contributions to your retirement plan,those contribution amounts will be free from income tax when distributed to you or your beneficiary.

Post-death distributions can sometimes be taken over more yearsIf you name an individual other than your spouse as beneficiary of your IRA or plan, that individual will generally be able to takerequired post-death distributions over his or her remaining single life expectancy. (Your beneficiary can always take more thanrequired in any year, but not less.) The younger an individual is, the longer his or her life expectancy according to the IRS tables.This means that choosing a young beneficiary (a grandchild, for example) will typically increase the payout period for post-deathdistributions. There are two important reasons why a longer payout period can be advantageous.

First, it maximizes the growth potential of the funds. The longer funds remain in an IRA or plan, the longer the investment earningscan compound tax deferred. Depending on the size of the account and investment performance, just a few more years oftax-deferred growth could produce thousands of dollars of additional earnings. The other advantage of a long payout period is thatit spreads out your beneficiary's income tax liability on the funds. Your beneficiary is able to pay less income tax each year, sincethe annual minimum required distribution amounts are smaller. With a short payout period, the larger distributions increase yourbeneficiary's taxable income each year, possibly even pushing him or her into a higher income tax bracket.

Caution: If there is more than one designated beneficiary, the oldest beneficiary's life expectancy must be used for purposes ofcalculating post-death distributions from the IRA or plan. However, this outcome can be avoided if separate accounts areestablished within the required time frame. Consult a retirement plan or tax professional.

Caution: With employer-sponsored retirement plans, the plan may generally decide whether to permit or require the lifeexpectancy payout for beneficiaries taking post-death distributions. Consult your plan administrator about the distribution optionsavailable.

Naming a nonspousal beneficiary may minimize estate taxWhen you die, the funds remaining in your IRA or plan will be included in your taxable estate to determine if federal estate tax isdue. (Your state may also impose an estate or death tax.) This is generally a concern if the value of your taxable estate exceedsthe federal applicable exclusion amount. Even if your taxable estate exceeds this amount, though, the unlimited marital deductionallows you to pass unlimited assets to your surviving spouse free from estate tax at your death. This may seem like a compellingreason to name your spouse as beneficiary of your IRA or plan, but there is more to the story.

If you have a large estate that you leave entirely to your spouse, the combined federal estate tax liability of you and your spousemay be higher than necessary. The reason? Leaving everything outright to your spouse may waste your applicable exclusionamount. If you leave a portion of your assets to someone other than your spouse (or in a credit shelter trust for your spouse), youcan take advantage of your applicable exclusion amount. The remainder of your estate can be left to your spouse, sheltered bythe unlimited marital deduction. When your spouse dies, your spouse's applicable exclusion amount will shelter at least a portionof his or her taxable estate. By utilizing both spouses' applicable exclusion amounts, this strategy can minimize your combinedestate tax liability. IRA or plan funds can be used for this purpose if you name a nonspouse as beneficiary.

Caution: Estate planning for retirement assets is a highly technical area. The right approach depends on your financial andpersonal circumstances. Be sure to consult a tax professional.

You will be providing for your loved onesYou want to make certain that all of your relatives and loved ones will be financially secure after your death. Depending on yoursituation, providing for everyone's needs can become a challenge when questions arise as to who should receive which assets.With IRA and retirement plan benefits, it is common to designate your spouse as primary beneficiary (assuming you are married)and children or grandchildren as secondary beneficiaries. Your surviving spouse may be able to roll over the inherited IRA or planinto his or her own traditional IRA (see below), and designate your children or grandchildren as primary beneficiaries of the newIRA. When your spouse dies, the children or grandchildren will receive the funds remaining in the IRA.

But this strategy may carry a risk. Once your surviving spouse rolls over the inherited funds, he or she may be free to choose anybeneficiaries for the new IRA (and can typically change beneficiaries right up until his or her death). You may implicitly trust that


April 02, 2019

your spouse will follow your wishes, especially if the two of you have discussed and planned for the future. But circumstances maychange after your death, and there is often no legal obligation for your spouse to name (or keep) your children or grandchildren asbeneficiaries. The risk is especially great if your surviving spouse remarries and names the new spouse as the primarybeneficiary. One way to avoid such an outcome might be to name your children or grandchildren as primary beneficiaries, and useother assets to provide for your spouse.

Tip: If you have multiple heirs to provide for and are concerned that your desired results may not be achieved after your death,you should seek professional advice from an estate planning attorney.

Disadvantages of naming a child, grandchild, or other individualNaming your spouse may be a better beneficiary choiceNaming your spouse as beneficiary often makes more sense than naming another individual. The main reason is that after yourdeath, your surviving spouse will probably have greater options and flexibility than other beneficiaries. In addition to takingdistributions over his or her remaining life expectancy, your surviving spouse can typically roll over inherited IRA or plan funds intohis or her own traditional IRA. Your spouse can choose the beneficiaries for the new IRA, and can delay taking distributions from ituntil after age 70½. (Other beneficiaries must start taking distributions from an inherited IRA or plan by December 31 following theyear of your death.) Your surviving spouse may also be able to treat an inherited IRA as his or her own IRA without rolling it over.Both of these post-death options are unique to surviving spouses.

Caution: Nonspouse beneficiaries cannot roll over inherited funds to their own IRA or plan. However, a nonspouse beneficiarycan make a direct rollover of certain death benefits from an employer-sponsored retirement plan to an inherited IRA (traditional orRoth).

Naming your spouse as beneficiary can also have a positive impact on your lifetime RMDs, but only if he or she is more than 10years younger than you are. In that case, the distribution payout period can be extended longer than it would otherwise be,allowing you to take smaller distribution amounts each year (as described above).

You should carefully weigh these issues against the perceived advantages of naming a child, grandchild, or other individual asbeneficiary of your IRA or plan. An estate planning attorney and/or tax professional can help you make the right beneficiarychoice.

You may have limited control over the funds after your deathIf you want to retain control over your IRA or plan funds after your death, naming a child or other individual as beneficiary may notbe the best choice. Even if your beneficiary is young and able to take post-death distributions over a long period (using the lifeexpectancy payout), he or she may not exercise this option. Your beneficiary might instead take larger distributions than required,or even take a one-time distribution of the entire amount. Such decisions may have adverse tax consequences for yourbeneficiary, especially if the money is all spent before paying the tax bill. Large distributions will also deplete the funds morerapidly, leaving your beneficiary with less money for the future. Finally, the distributed funds will miss out on furtherincome-tax-deferred growth opportunities.

These risks are greater with grandchildren or other young beneficiaries, who may be more likely to squander the inherited funds.However, you can often minimize the risk and retain some control after your death by setting up a trust for the benefit of yourintended beneficiaries. You then designate the trust itself as primary beneficiary of your IRA or plan, allowing your chosen trusteeto manage the funds after your death. The drawback is that trusts tend to be costly and complicated to set up. For moreinformation, consult an estate planning attorney.

Naming a grandchild or other young beneficiary may raise additional death taxissuesIf you expect to have a large estate when you die, naming your grandchild (or other individual two or more generations youngerthan you) as beneficiary of your IRA or retirement plan may raise additional death tax issues. This is because federal law currentlyimposes an extra "generation-skipping transfer tax" on transfers of assets in excess $5.43 million for 2015 to an individual who istwo or more generations younger than you. For more information, consult an estate planning attorney.


Ameriprise FinancialFjosne & Associates

Grant R. Fjosne, ChFC®,CRPC®, CFS®, APMA®

Private Wealth Advisor1907 Wayzata Blvd. East

Suite 350Wayzata, MN 55391

[email protected]

April 02, 2019Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019

The information contained in this material is being provided for general education purposes and with theunderstanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. Itdoes not address or account for your individual investor circumstances. Investment decisions should alwaysbe made based on your specific financial needs and objectives, goals, time horizon and risk tolerance.

The information contained in this communication, including attachments, may be provided to support themarketing of a particular product or service. You cannot rely on this to avoid tax penalties that may beimposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issuesspecific to your circumstances.

Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized togive legal or tax advice. You are encouraged to seek the guidance of your own personal legal or taxcounsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC.

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