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Rules are complex for IRA inheritances

On Behalf of | Dec 14, 2012 | Estate Planning |

Individual Retirement Accounts are investments designed to provide income during the later years of life. What happens to IRAs or the unused portions in them after death? Ideally, a Los Angeles estate planning expert will ensure that the IRA or remaining sum benefits heirs.

Ignoring or misunderstanding IRA distribution rules can cause unnecessary taxation during life and financial headaches for beneficiaries. IRA owners must be aware when to begin taking distributions and how much to withdraw to avoid tax implications.

An IRA distribution becomes mandatory on the first day of April after the account owner turns 70 ½ years old. A minimum amount must be taken from the account annually. If not, the government imposes a 50 percent “accumulations” tax on the difference between what was distributed and what should have been withdrawn.

A calculation involving a life expectancy figure is used to decide the yearly amount that must be withdrawn from an IRA. It doesn’t matter how many IRAs a person owns or which IRA is tapped for distributions. As long as the minimum amount is removed from any of the total number IRAs, the government will not tack on the excess tax.

Qualified designated beneficiaries of IRAs are people including relatives and non-family members. Some trusts, but not all, also may be named as qualified designated beneficiaries.

The life expectancy calculation is reworked for a qualified beneficiary or, in the case of qualified trusts, according to the life expectancy of a trust beneficiary. Charities, the majority of trusts and estates are not qualified designated beneficiaries, which have a “ghost” life expectancy limit or five years to remove money from the inherited IRA account. The full withdrawal date depends on the status of the account at the time of the original owner’s death.

An Individual Retirement Account should work as hard as possible for as long as possible. Because of this, estate planners often discourage naming non-qualified designated beneficiaries — especially for tax free Roth IRAs.

Source: marketwatch.com, “Top 10 IRA-planning mistakes,” Robert Powell, Nov. 29, 2012