Updated Friday, July 25, 2014 as of 4:57 AM ET
Blogs - Ask Ed Slott
Segregating RMDs; Combining Roth IRAs
Thursday, April 12, 2012
Print
Email
Reprints
Partner Insights

Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

This week, IRA expert Ed Slott answers questions about segregating required minimum distributions and combining Roth IRAs.

Question 1:

If you have multiple accounts, (401(k), Thrift Savings Account (TSA), IRA) do you have to segregate your RMD from each account or can you take the sum of the RMD due from one account?

Answer:

You can never take an RMD for one type of account from a different type of account. You will have to take the 401(k) RMD from the 401(k), the TSA RMD from the TSA and the IRA RMD from the IRA. If you had multiple IRAs, then you could combine the IRA RMDs and take them from any account.

Question 2:

I have several Roth IRA accounts that were created in different years. Can I combine a six-year-old account with a one-year-old account and a three-year-old account? How will that affect my ability to withdraw tax-free earnings? I am 66 years old.

Thanks,

Catherine

Answer:

For distribution purposes, all of your Roth IRAs are considered one account and there are ordering rules for Roth distributions. Your annual contributions are distributed first, even if you take the distribution from an account that contains no contributions. These are always distributed tax and penalty free.

Then your converted amounts come out on a first in, first out basis. If you are under age 59 ½ and the conversion has not been held for five years, then the early distribution penalty would apply to any amounts that were taxable at the time of the conversion. Once all of your contributions and converted amounts are distributed, and then your earnings come out.

If you have had any Roth account established more than five years ago and you are over age 59 ½, then the distribution of earnings is tax and penalty free. In your case, since you have an account that is more than five years old and you are age 66, any distribution you take from any of your Roth accounts will be tax and penalty free.

Question 3:

What procedure, documentation and/or forms are required for properly setting up separate accounts for the beneficiaries of my traditional IRA? Currently, I have two daughters listed, each at 25%, and four grandchildren, each at 12.5%. What I want to accomplish is the stretch where each can use their own life expectancy table.

Secondly, I am contemplating eliminating my daughters as beneficiaries from the IRA account since I have provided adequately for them with life insurance and designating the four grandchildren at 25% each.  My question is: Can I do this, they are currently all minors and I have been told that they as minors cannot inherit my IRA.  True or False?  I am seeking accurate information on this and will appreciate your response. 

Thank you,

Marla Fett

Answer:

You can separate your accounts now and name individual beneficiaries on each account. Just make sure that your IRA custodian will recognize your separate beneficiaries. Some custodians may allow multiple accounts but require that you have the same beneficiary on all accounts. Or, you can do as you have and name multiple beneficiaries on your account.

Then, at your death, your beneficiaries will have until December 31st of the year after your death to establish their own inherited IRAs. They will have to fill account paperwork with the IRA custodian and the funds will have to be moved in a direct transfer from your account to the inherited accounts.

Any check payable to a non-spouse beneficiary, such as your children and grandchildren, will be taxable to them. You should check with your IRA custodian to see if they will allow this type of transfer, as not all custodians will. Minors can inherit IRAs, but they cannot legally sign the IRA paperwork, they cannot request the annual required distributions and they cannot make investment decisions. You have some options, but they all have their drawbacks:

1) You can name a trust for the benefit of the minors as the IRA beneficiary. This type of trust must be carefully drafted to ensure that it complies with both the trust rules and the IRA rules. A properly drafted trust can use the age of the oldest trust beneficiary for calculating required distributions after your death.

2) You can name an UGMA or UTMA (uniform gift to minors) trust as the beneficiary of the IRA. This type of trust transfers the asset to the child when the child reaches the age of majority. 

3) If state law and your IRA custodian allow, you can name a guardian or trustee for the child in your will to handle the IRA and its distributions. I

If your IRA has a large balance, it would be best if you consulted an IRA expert to determine the best course of action for leaving your IRA to your grandchildren. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

 

 

 

 

Comment
Be the first to comment on this post using the section below.
Post a Comment
You must be registered to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
Lists
2014 Summer Reading List for Advisors

Current Issue

The July Issue is now online!


TWITTER
FACEBOOK
LINKEDIN

Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here