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Avoid IRA Mistakes

You could be losing huge amounts of money on your IRA account.

A recent Forbes Magazine study showed that 90% of IRA account administrators did not know the options available for IRAs. If the administrators don't understand, how many individuals understand the options and possibilities for their IRAs? Not many, but Bruce knows and he'll let you in on the hidden powers of the IRA.

Things To Remember

1. The name of the game is that Uncle Sam wants us to take the money out of our IRAs so it can be taxed. That tax can be as much as 75% because you have both income taxes and potentially estate taxes to pay on an IRA, 401(k), or any kind of qualified money.
2. Most company 401(k) plans are so inflexible that they make it almost impossible for someone to use multi-generational planning. Therefore, one of the most important things you can do is, as soon as you are allowed, to immediately get the money out of your 401(k) and into an IRA where the funds can be treated in a more flexible manner.
3. Remember that most people in the financial world do not understand how IRAs can and should be used. A Forbes study showed that 90% of the IRA account administrators did not know the options available for IRAs. This means that your chance of finding someone who really understands how IRAs should work is small. But don't abandon hope. Keep searching until you find someone who does. It will be worth the effort.
4. Death beneficiary designations are not just about who is going to get your money when you die. They are among the most important selections you will ever make in relation to your retirement money. You need to understand all the consequences of who you designate as a death beneficiary when you set up your IRA. Estate planning and IRA planning should go hand in hand. If your IRA planning is done properly, it should dramatically reduce the total amount of taxes that your family has to pay upon your death.
5. It is imperative to get good financial help immediately after the death of a participant in an IRA because, if the wrong selections are made, often the spouse’s ability to inherit the IRA is eliminated. The children’s ability to inherit the IRA as an IRA for them, without it coming out and being taxed, is also eliminated.

The Following Assumptions Are Based On Death Of The Owner Of The Ira Account Occurring Before The Required Beginning Date

1. If you have no designated beneficiary, then the money must be distributed within five years of the death of the owner of the IRA.
2. You are considered to have no designated beneficiary if you leave the money to charity, a non-person such as a trust, or to your estate. The exception to this is the newer trusts. As of 1998, trusts are allowed to be beneficiaries of IRAs if they have the new provisions.
3. If you name a charity or a trust as a partial beneficiary of an IRA, the IRA is considered to have no designated beneficiary. The money must then come out of the IRA and be taxed within five years of participant’s death. You should not make any non-person a beneficiary of an IRA because then the entire IRA must come out and be taxed within five years of the participant’s death. In order for an IRA to continue on beyond five years after the death of the participant, you must have an individual as the beneficiary or one of the post-1997 trusts.

Individual Non-Spousal Beneficiaries If Death Of The Participant Occurs Before The Required Beginning Date

1. On the death of the participant, if a single individual is the beneficiary of the IRA, the distributions to that person can be based on his or her life expectancy. So, if this were a grandchild and his or her life expectancy was 70 years, he or she would take out 1/70^th the first year, 1/69^th the second year, etc. As you can see, this dramatically extends the time period that the money can stay in the IRA and continue to accumulate tax deferred. Also, any individual can be named as the non-spousal beneficiary. And if you choose a non-spousal beneficiary, the non-recalculation method must be chosen as the method of distribution.
2. If you have a group of individuals as beneficiaries, then the distributions will be based on the age of the oldest person in the group. If there is a great deal of age difference between the beneficiaries of the IRA, it may be prudent to split that IRA into several IRAs.

Spouse Is Beneficiary And Participant Dies Before The Required Beginning Date

The spouse has two choices:

1. He or she can leave the entire amount in the participant’s IRA and distributions are not required until the calendar year in which the participant would have reached age 70 had he or she lived. Then the surviving spouse can use his or her life expectancy to make the minimum distribution required under the regulations. The surviving spouse has the ability to use the recalculation method or the fixed method.
2. The second alternative for the spouse is the "Fresh Start." The Fresh Start entails transferring a spouse’s IRA into what is called a "spousal IRA" and from there they can treat it as if it were their own IRA and delay distributions from that IRA until they reach age 70. They can also name new beneficiaries.

DEFINITIONS

Participant - The participant is the person who owns the IRA.

Required Beginning date - April 1^st of the year following the year in which the owner of the IRA turns 70 years old. This is the date Required Minimum Distributions start.

Beneficiary - The person or persons who will receive the money from the IRA account when the participant dies.

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