Part 50

Thomas M. Boles, 33°, Grand Cross

A few simple steps will assure family members or others are properly benefited by IRA accounts.

I recently read an article from the Associated Press I thought was worthy of passing on to all my Masonic friends, especially those nearing retirement and those already retired. It seems that Individual Retirement Accounts (IRAs) hold the bulk of your personal wealth. Yet IRA owners frequently make mistakes in designating beneficiaries and how those beneficiaries will receive the IRA’s assets after the owner’s death. These mistakes can significantly reduce the amount beneficiaries receive after taxes or otherwise thwart the intent of the IRA owner, according to a pension specialist at the College for Financial Planning.

"This is a very complex area of the law," says Robert Pennington, an academic associate at the college. "IRA distribution planning is a highly sophisticated area because it requires knowledge in income tax planning, estate or inheritance laws, and retirement laws. In addition, the process involves investment and financial planning." Pennington describes 10 traps that owners of deductible IRAs (many of the new Roth IRA rules are different) often fall into:

(1) Failure to name a beneficiary. This presents many potential problems. First, if the IRA owner doesn’t name a person before minimum distributions must begin (no later than April 1 of the year following the year they turn 70½), the payouts are based on the owner’s life expectancy. Naming a beneficiary can stretch out the required payments over the combined life expectancy of the owner and the beneficiary. Worse, if the owner dies before age 70½ and he or she has not named a beneficiary, all the assets in the IRA must be distributed to the estate’s beneficiaries within five years of the owner’s death. That could trigger large tax bills if the IRA holds significant assets.

(2) Failure to name a "designated" beneficiary. The IRS defines designated beneficiaries as individuals, groups of individuals or persons named in a trust that meets certain additional tax law requirements. Naming your estate, business, or favorite charity as your IRA beneficiary, however, may be the same as not naming a beneficiary at all—with the same adverse tax consequences described above.

(3) Failure to name a contingent beneficiary. If the primary beneficiary dies before the IRA owner starts minimum payouts, the payments may have to be made based solely on the owner’s life expectancy. Naming a child or grandchild as a contingent beneficiary can stretch out the payments over two lifetimes, according to Pennington.

(4) Failure to rename beneficiaries. After a divorce, for example, a former spouse could receive the proceeds from an IRA at the owner’s death if the owner hadn’t named his or her current spouse as the beneficiary.

(5) Failure to notify beneficiaries. Let your beneficiaries know they are named as beneficiaries of the IRA and that they must start withdrawals within the required time period. Otherwise, if they find out after the deadline, the payments may need to be made over a very short time, which could mean higher tax bills.

(6) Failure to carefully read IRA documents. For example, some IRA plans state that payouts will automatically be recalculated every year unless the owner selects another option. Other plans automatically make payments without recalculation. Each option presents advantages and disadvantages.

(7) Failure to consider the spousal rollover. When the IRA owner dies before mandatory minimum withdrawal begins, a surviving spouse named as the beneficiary has two choices. First, he or she can leave the IRA in the deceased’s name and not start making minimum withdrawals until December 31 of the year after the deceased would have reached age 70½. In some cases, this may be the best choice. The second option is to roll the IRA proceeds into the survivor’s own IRA. This allows a younger surviving spouse to delay starting minimum withdrawals until he or she turns 70½. Those payments can be stretched out even more if the surviving spouse names a beneficiary.

(8) Failure to consider payout methods. IRA owners often choose single-life expectancy for the payout option, or they don’t choose one at all and single-life is chosen by default according to the plan requirements. Single-life may be the right choice for you, but keep in mind that by naming a beneficiary and choosing the joint-life expectancy, you can shrink the required minimum pay-outs and thus make the money last longer.

(9) Failure to consider a trust as beneficiary. The IRS recently proposed new regulations that will make it possible to name a revocable (living) trust as an IRA beneficiary. This allows more flexibility for the IRA owner than under the old regulations. This is a complicated tax area, so you’ll want to consult with your financial adviser.

(10) Failure to do proper estate planning. Pennington advises that who and how you name IRA beneficiaries be considered in light of your retirement income needs, inheritance issues, tax issues, and other estate planning considerations.

Which leaves my "ad" for this month to read: Many receive advice, only the wise profit by it.

Please Note: This information is distributed with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expertise is required, the services of a competent professional should be sought. From A Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

Thomas M. Boles
has worked extensively in fundraising for children’s programs throughout our Fraternity. For more information see coupon above, or call Tom at 562–691–4227 (Fax 562–691–5327) or the Scottish Rite Foundation, S.J., USA, at 202–232–3579, ext. 122.

Bretheren Benefit From A Pooled Income

What is one of the better ways to benefit yourself and your family and, at the same time, support the Scottish Rite and its Childhood Language Disorders Program? The answer is simple: The Scottish Rite Pooled Income Fund!

The Scottish Rite Pooled Income Fund allows you and, if you wish, your wife and/or other beneficiary(ies) to receive a worry-free lifetime income as well as attractive tax benefits by joining the Fund via a financial gift to The Scottish Rite Foundation, S.J., USA. For more information call, 1–800–486–3331 or fax 202–387–1843.

Grand Commander Kleinknecht will personally respond to your inquiry. If he is not available, please leave your name and number, and the Grand Commander will return your call at his earliest opportunity. Through the Scottish Rite Pooled Income Fund, you can do well for yourself and your family while also doing good for others!