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February 6, 2010

THOMAS YOUNG | Know the rules on IRAs

By THOMAS YOUNG The Tribune-Democrat Sat Feb 06, 2010, 10:49 PM EST

Lawyers get involved in the darndest things. One of the darndest things is an IRA, the individual retirement account. And how do we get involved?

Well, frequently clients who come to have a will prepared also have an IRA, so we are asked advice about it, too. So here goes.

Most people know you can’t dip into an IRA account until you are 59½ years old. If you do, you will have to pay a 10 percent early distribution “tax.”

Funny government – it’s a penalty for trying to spend your retirement money early.

There are, however, exceptions.

If you take out money because you’re disabled, or to pay medical expenses or child support or alimony, or to pay a federal tax levy, it will be OK.

There are other exceptions, too – such as death. Just make sure the account is in your name when you die. If not, change it or decide to live to 59½.

For a great number of people the named beneficiary of an account is a spouse. So, when you pass on, your spouse can have all of the account.

Tell her or him not to take it.

The income tax, which has never been paid on the money in the account will kill her (or him.)

What to do?

Most people will roll it over into their own IRA account. If they don’t have one, they should create one.

Either way, they have complete control of the money and the rules about mandatory annual withdrawals (RMDs) will still be the same. He or she can do this at any time after your death. There is no time limit.

There also is no reason to wait. One thing to remember – if the owner didn’t take his required distribution in the year of death, the spouse must take the distribution the decedent would have taken before she can roll over the account.

The usual table used by bankers, brokers, etc. to calculate your RMD is called the Uniform Lifetime Table. You divide the money in the account as of Dec. 31 by a divisor set forth in the table opposite your age.

For age 70 (the age when you must take money out) the divisor is 27.4. On $100,000 that’s $3,649.64, but when you’re 80 the divisor is only 18.7, so you have to take out more money, $5,347.59 to be exact. It increases each year.

If you don’t have a spouse, you can name any number of people as beneficiaries, and they can advise the plan custodian to divide your IRA into smaller IRAs after your death, one for each beneficiary.

Each beneficiary can use his or her life expectancy to compute the required distributions.

There are many, many rules.

Space allows me to discuss just a few. Don’t change the title of your IRA or add or subtract names without discussing it with your IRA custodian.

Thomas Young, a graduate of Pitt and Harvard Law School, has been a lawyer in Johnstown since 1958. He is a former professor of business law at Pitt-Johnstown. Readers may send questions to Young in care of The Tribune-Democrat. The opinions expressed in this column are general in nature and may not apply to your situation. Consult your attorney for advice on specific legal matters.

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