Inherited IRA FAQ
Sep/090
What is an Inherited IRA?
An inherited IRA allows a spouse or non-spouse beneficiary of an IRA to keep his inherited IRA assets tax-deferred until the IRS requires the funds to be distributed. When the account holder dies, a spouse beneficiary may either transfer the assets into an inherited IRA, complete a spousal transfer and treat the assets as his/her own. A non-spouse beneficiary may transfer the assets into an inherited IRA in his/her own name, and begin taking distributions on a distribution schedule based on his life expectancy.
Who can open an Inherited IRA?
Any spouse or non-spouse beneficiary of a Traditional, Rollover, SEP, SIMPLE or Roth IRA can open an Inherited IRA. With an Inherited IRA, the assets can remain tax-deferred - until IRS regulations require that they be withdrawn.
If I am a non-spouse beneficiary, can I just roll the IRA assets I inherit into an existing IRA account?
No, only spouse beneficiaries can treat inherited IRA assets as their own by transferring the assets into an existing or new (non-inherited) IRA.
Can I make additional contributions to my Inherited IRA?
No, contributions to Inherited IRAs are not permitted.
What are the rules for taking distributions from an Inherited IRA?
A beneficiary must first transfer the funds into a beneficiary IRA account. If he/she chooses not to take a lump sum distributions, there are several different options governing the amount and time frame of the distributions depending on several factors such as age, type of IRA, and type of beneficiary.
When can I take money out of my Inherited IRA?
You can make redemptions from an Inherited IRA at any time after it is re-registered into your own name.
Am I required to take money out of my Inherited IRA?
As the owner of an inherited IRA you may be required to either liquidate the account within five years of the December following the original owner’s death OR to choose by September of the year following the original owner’s death to take substantially equal payments over the longer of yours or the original owner’s life expectancy.
What is the deadline for establishing separate “inherited IRAs” so that each beneficiary can use his/her own life expectancy to measure MRDs?
The deadline is Dec. 31 of the year after the year the IRA owner died. The beneficiaries can split up an inherited IRA at a later date; however, a division occurring after the above deadline would not be effective to change the applicable life expectancy for measuring MRDs. All beneficiaries would have to use the oldest beneficiary’s life expectancy to measure MRDs if the “separate accounts” are not established by the end of the year after the year of death.
Roth IRA Basics
Jul/090
Here are some of the basics of Roth IRAs.
Income thresholds for Roth IRA. To be eligible to contribute to a Roth, you must have taxable income. Next, you must have a modified adjusted gross income (MAGI) (modified specifically for purposes of determining your Roth eligibility) that is under a certain threshold.
The MAGI thresholds in 2009 are as follows:
• If you’re married filing jointly, $176,000 with a phase out beginning at $166,000.
• If you’re single or married, filing separately, and you did not live with your spouse at all during the year, $120,000, with a phase out beginning at $105,000.
• If you’re married, filing separated, and you did live with your spouse for at least part of the year, $10,000, with a phase out beginning at $0.
Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows:
Plus:
1. Traditional IRA Deduction,
2. Student loan interest deduction,
3. Tuition and fees deduction,
4. Domestic production activities deduction,
5. Foreign earned income exclusion,
6. Foreign housing exclusion or deduction,
7. Exclusion of qualified bond interest shown; and,
8. Exclusion of employer-provided adoption benefits.
Subtract:
1. Roth IRA conversions,
2. Roth IRA rollovers from qualified retirement plans; and,
3. Minimum required distributions from IRAs
How much can you contributeto a Roth IRA? If you are eligible to contribute to a Roth IRA prior to the phase out limits, the maximum contribution is $5,000 or your taxable compensation, whichever is higher. If you are over 50 years old, the limit rises to $6,000. The extra $1,000 is considered a catch-up contribution. If you’re also contributing to a traditional IRA, however, the total of your IRA contributions (traditional + Roth) is still limited to either $5,000 or your taxable compensation.
Some other exceptions also apply: People who worked for employers who went bankrupt in previous years are, in some cases, allowed to make additional “catch-up” contributions. This is a limited exemption to employees of bankrupt companies that had a 401k plan that match contributions at a rate of at least 50% in company stock. The company or an employee also had to have been part of an indictment as part of the bankruptcy. Employees of airlines who went bankrupt may be permitted to make special contributions from airline payments.
Some types of income are ineligible for Roth contributions. There are some types of income ineligible for contributions to a Roth IRA. You can’t use capital gains, dividend income, interest income, and income from rental properties to contribute to a Roth IRA. (If you have other income, that won’t matter, but if you happen to make most of your money from investments, this could be an obstacle to establishing a Roth IRA.)
Unlimited Roth Conversions Coming in 2010. I hope this outline of requirements helps you to understand your likely eligibility for a Roth IRA. Remember, too, even if you’re not eligible to contribute to a Roth in 2009, you will be eligible to convert a traditional IRA to a Roth in 2010 if you want to. So, I’d recommend making a non-deductible contribution to a traditional IRA for the 2009 tax year and converting it to a Roth IRA in 2010.
If you have any question about Roth IRAs, please feel free to email or call me.
Derek Pilecki
Gator Capital Management
(813) 282-7870
derek.pilecki@gatorcapital.com