Second Mid-term Notes - 1 DISPOSITION OF IRA ACCOUNTS UPON DEATH OF ACCOUNT OWNER Ordinarily the owner of an IRA designates primary and contingent

1 DISPOSITION OF IRA ACCOUNTS UPON DEATH OF ACCOUNT OWNER: Ordinarily the owner of an IRA designates primary and contingent beneficiaries as well as the percent of the account to go to each beneficiary: Example : Husband names spouse as primary beneficiary and 3 children in equal shares as contingent beneficiaries. If spouse survives husband and does not disclaim the transfer of ownership, then entire IRA goes to her. If spouse predeceases the husband, then the three children split to IRA in equal amounts as contingent beneficiaries. Note: Beneficiary designation takes precedent over any wording in the will of the deceased. Beneficiary must be “determined” by September 30 of year following IRA owner’s death. IRA owner must name beneficiary before he/she dies (obviously), however, named beneficiaries have until Sept. 30 of year following death to disclaim their share. This can be important estate planning tool! Also, if named beneficiary dies subsequent to IRA owner’s death but before beneficiary has been “determined”. That deceased beneficiary can still be the designated beneficiary. IRA would go to the deceased beneficiary’s estate. Separate Accounts: An IRA owner can own several different IRA accounts and can divide any one account into several different IRA accounts (rollovers) with each account having different beneficiaries. A) Account owner dies before RBD : 1. Spouse is beneficiary: A. S 2 has the option to “roll over” S 1 ’s (deceased) IRA to a new IRA titled in S 2 ’s (the surviving spouse) name -- “ Spousal inherited IRA .” If the accounts are traditional IRA’s, RMD’s must begin by April 1 of the year after the S 2 attains the age of 70½. Amounts are determined by the Uniform Life Table and S 2 ’s age.

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2 B. If S 2 does not roll over S 1 ’s IRA, S 2 can either begin taking distributions immediately (including entire balance) or defer them. No early withdrawal penalty due to “death of account owner” exception. – “ Decedent” or “Beneficiary” IRA. NOTE: However, RMD’s must begin by Dec. 31 of the year in which S 1 would have reached age 70½. Note: In this case RMD’s are based upon S 2 ’s age using the Single Life Table (Figure 9.2) and recalculated each year by referencing the Single Life Table. C. S 2 also has option to distribute entire balance by the Dec. 31 of the fifth year following deceased spouse’s death. “ Five year rule” Under the “5-year rule” there are no RMD’s for any year other than the fifth year when the balance of the account must be distributed. RBD is Dec. 31 of fifth year after death. RMD is entire remaining balance. 2. Nonspouse Individual Beneficiary: A. Keep account in deceased owner’s name (no rollover). It must, however, be identified as “inherited IRA FBO the beneficiary”. Also, beneficiary cannot make any contributions to inherited IRA .