Till Death Do Us Part.  When a couple join in holy matrimony, there are many new discoveries awaiting them.  When it comes to their finances, there are potential to be some added benefits: joint checking accounts for consolidated record keeping, joint tax filing status, and lastly; the ability to contribute for a non-working spouse to contribute to their IRA.  Ahhhh….isn’t marriage bliss? There are special rules and restrictions that apply to spousal contributions to IRAs that should also be considered when selecting an IRA for your family.  Here we look at some of those rules to help you make an informed decision regarding your IRA account.

Disclaimer: While as tempting as it sounds, I would not suggest that a young couple elope just to be able to have access to a spousal IRA

Rules for spousal contributions.

There are a few basic rules to consider if you will be making contributions to your spouse’s IRA.  For the year that you are making contributions, you must meet the following criteria:

• Married to your spouse at the end of the tax year.
• Spouse earned taxable income for the tax year.
• File a joint federal income tax return.
• Your taxable income must be less than that of the owner of the IRA.

It is also important to remember that the contribution limits are subject to change therefore it is important to remain up to date with IRS tax limits regarding maximum contributions that both you and your spouse can make to an IRA each year.

Spousal IRA Contributions

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In order to contribute to an IRA you must have taxable income.  This includes wages, commissions, bonuses and self employment income.  This would generally rule out contributions made to an IRA from a non-working spouse, however that is not the case.  Spousal contributions can be made to an established IRA from a spouse using the compensation income of the working spouse.  This can be beneficial for stay-at-home parents or non working spouses who wish to contribute to retirement savings.  In 2010 the contribution limits for the non-working spouse under the age of 50 was $5,000 for the tax year.  This is in addition to the $5,000 their working spouse could contribute, equaling a total of $10,000 in possible savings.  If you are 50 years of age or older, you can contribute an additional $1,000 per year in “catch up” contributions.

Taxation of Spousal IRA Contributions

Spousal contributions are taxed just as owner contributions.  This will depend on the type of IRA account to which you are contributing.  With a traditional IRA, all or most of your contributions can be considered a tax-deduction if you meet certain income requirements.  While this is a great tax benefit at the time of contribution, it is important to remember that distributions from the traditional IRA will be subject to taxation.  Contributions made to a Roth IRA are not considered tax deductible and will be subject to income taxes when you file your federal income tax return.  While the tax benefits are not immediately realized, you will not have to pay further taxes when you take qualified distributions.

As you can see there are several factors to consider before deciding which type of IRA is right for you and your family.  Once the decision is made, rest assured that you and your spouse are taking the necessary action to ensure a financially secure retirement.  And if you haven’t told your significant other that you love them in a while, here’s your chance

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

photo credit: Derek K. Miller

With the exception of financial experts, deciphering the rules of individual retirement accounts can often leave a person confused and frustrated. While the gist of most IRAs is relatively easy to comprehend, once a person begins investigating the rules, requirements and exclusions, things tend to get a bit tricky. This becomes even more apparent when you find yourself named as a beneficiary of an IRA from a friend or family member who has passed.

Inherited IRAs constitute some of the largest assets left in an estate. For this reason any heirs who find themselves in a position of deciding what to do with an inherited IRA should think carefully about all the options before making their final decision. Since this decision can have a huge impact on your own personal finances (in both positive and negative ways) most beneficiaries will benefit by consulting with a tax professional or financial advisor experienced in this area.

The following information is provided to help you understand what options are available to you regarding inherited IRA rules. Distribution of assets for some IRAs must begin at age 70 1/2 (April 1 of the year following this birthday), therefore some of the options are based on whether the owner of the IRA died before or after that cut off date.

Five year rule of Inheriting an IRA

photo credit: Mykl Roventine

When the owner of the IRA does not specify a beneficiary or simply names the estate as the beneficiary, the rules for withdrawal or distribution of assets state the entire amount of the IRA must be distributed by December 31st of the fifth year following the death of the owner. This five year rule applies if the owner of the IRA passed away before mandatory distributions began. If the owner of the IRA had already passed the mandatory distribution age, the distribution of the IRA must follow the terms elected by the owner.

Non-spousal beneficiaries

For non-spouse beneficiaries who inherit an IRA after the minimum distribution date has passed, options are fairly limited. In most cases you would have to follow the same distribution schedule set forth by the owner of the IRA, this includes collective life expectancies or recalculating life expectancies. If the owner of the IRA passes away prior to the mandatory distribution date, you may elect to have the entire balance distributed within five years or over a period not to exceed your life expectancy.  This is what is referred to as a stretch IRA.

Inheriting an IRA from a Spouse

If the owner of the IRA was your spouse, you have the same options available to you as that of a non-spouse beneficiary. In addition, you may opt to treat the inherited IRA as your own which would eliminate the minimum distribution rules that normally apply after the owner of the IRA has passed. If this option is taken, the surviving spouse then becomes the owner of the IRA and the benefits and rules apply to the surviving spouse not the decedent.

As you can see there are many rules and restrictions that apply to the distribution of IRAs after the owner has passed. As the beneficiary of an inherited IRA, it is imperative that you research and understand all of the rules and restrictions to avoid making decisions that will cost you money down the road, either in the form of lost earnings or paying too much to the government. By handling the inherited IRA in the best possible manner, you have the opportunity to benefit from the inheritance as the owner surely intended when they named you as a beneficiary.

This is a guest post from Junior Boomer who runs the blog Consumer Boomer, aimed at the Baby Boomer generation. Consumer Boomer is not endorsed or affiliated with LPL Financial.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
photo credit: VoisineN

Stretch Out Your IRA

If you don’t expect to deplete the assets in an IRA during retirement, then it’s a good idea to determine the most efficient way of transferring the account balance to your heirs in a manner that preserves the account’s tax-deferred growth potential for as long as possible. For many Americans, transferring wealth with a multi-generational stretch IRA can be an ideal solution. By naming a younger individual as the beneficiary, he or she will be able to stretch the life of the IRA by making (smaller) required withdrawals based on his or her (longer) life expectancy. With a “stretch IRA” strategy, more money can then remain in the IRA with the potential for continued tax-deferred growth. For those who do not currently have any IRA beneficiaries, the stretch technique could provide significantly greater long-term benefits than simply allowing the account balance to be paid out to your estate as a taxable lump-sum distribution.

Stretch IRAs were made significantly more convenient when the IRS revised the rules governing required minimum distributions (RMDs) from IRAs. Please keep in mind that the required minimum distributions have been suspended for 2009, but will resume in 2010. The three key rule changes affecting stretch IRA allow you to:

1. Name beneficiaries after RMDs have begun
2. Change beneficiary designations after the account owner’s death
3. Receive RMDs as a beneficiary that are calculated based on your own life expectancy

Whether you’ve amassed assets in an individual retirement account (IRA) by making regular contributions through the years or by “rolling over” a lump-sum distribution from a workplace retirement plan, you may want to consider whether it will be necessary to use all of that money to support yourself during retirement. If the answer is “no” (or even “maybe not”) then you’ll need to determine the most efficient way of leaving the account balance to your heirs while simultaneously safeguarding your accumulated wealth for as long as possible.

Stretch It Out

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For many Americans, transferring wealth with a multigenerational “stretch” IRA is an ideal solution. A stretch IRA is a strategy for a traditional IRA that passes from the account owner to a younger beneficiary at the time of the account owner’s death. Since the younger beneficiary has a longer life expectancy than the original IRA owner, he or she will be able to “stretch” the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA with the potential for continued tax-deferred growth.

Creating a stretch IRA has no effect on the account owner’s minimum distribution requirements, which continue to be based on his or her life expectancy. Once the account owner dies, however, beneficiaries begin taking RMDs based on their own life expectancies. Whereas the owner of a stretch IRA must begin receiving RMDs after reaching age 70 1/2, beneficiaries of a stretch IRA begin receiving RMDs after the account owner’s death. In either scenario, distributions are taxable to the payee at then-current income tax rates.

It’s worth noting that beneficiaries also have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner’s death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA and tax-deferred growth throughout his or her lifetime.

Added Perspectives

Your enhanced ability to stretch IRA assets is a direct result of an IRS decision to simplify the rules regarding RMDs from IRAs. The new rules allow beneficiaries to be named after the account owner’s RMDs have begun, and beneficiary designations can be changed after the account owner’s death (although no new beneficiaries may be named at that point). Also, the amount of a beneficiary’s RMD is based on his or her own life expectancy, even if the original account owner’s RMDs had already begun.
Consider the Implications

• The ability to name new beneficiaries after RMDs have begun means that you can include a child in your stretch IRA strategy regardless of when the child was born.
• The ability to change beneficiary designations after the account owner’s death means that one beneficiary may choose to disclaim his or her own beneficiary status so that more assets pass to another beneficiary. For example, if an account owner names his son as the primary beneficiary and his grandson as the secondary beneficiary, the son could remove himself as a beneficiary and allow the entire IRA to pass to the grandson. RMDs would then be based on the grandson’s life expectancy, not on the son’s life expectancy, as would have been the case if the son remained a beneficiary. (When there is more than one beneficiary, RMDs are calculated using the life expectancy of the oldest beneficiary.)
• The ability of beneficiaries to base RMDs on their own life expectancy means that the money you accumulate in your IRA and leave to heirs has the potential to last longer and produce more wealth for younger generations. (See example.)

Keep in mind that this information is presented for educational purposes only and does not represent tax or financial advice. While it is true that recent regulatory changes have indeed made it much easier to incorporate a stretch IRA into your multi-generational financial planning initiatives, it’s always a good idea to speak with a tax professional before implementing any new tax strategy.

Get a Good, Long Stretch

Stretch IRA in Action

Assume that you leave a $100,000 IRA to a five-year-old beneficiary who has an estimated life expectancy of 77.7 years, according to current IRS life expectancy tables. If the account earned an 8% average annual rate of return, its value could grow to $1.67 million by his or her 55th birthday. That amount is on top of the nearly $790,000 in taxable RMDs that would have been withdrawn from the account during the 50-year time period.*

* For illustrative purposes only. Not indicative of any particular investment.