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Common mistakes made in IRA planning, P.1

Individual Retirement Accounts are widely used investment tools for retirement. To get the most out of an IRA, though, special estate planning considerations come into play. While IRAs are often used to provide for heirs directly or through a trust, the extent to which one’s heirs will benefit and avoid burdensome taxes depends on doing proper planning. In our next couple posts, we’ll take a look at common mistakes made with IRAs.

The first thing is to keep in mind that at the required beginning date, required minimum distributions must be taken every year by December 31. Those who fail to do so will have to pay the federal government a 50 percent “Excess accumulation tax” on the difference between what should have been taken for the current tax year and what was actually taken out in the current year.

Those with multiple IRAs do not need to take a required minimum distribution from each IRA. Instead, the total required minimum distribution can be taken from one of the IRAs. Another important thing to remember is that those who take the required minimum distribution from an IRA held by another custodian should be sure to rebalance the overall asset allocation of their IRAs.

Another mistake to be aware of is naming a non-qualified designated beneficiary. Whereas qualified beneficiaries include individuals and certain trusts, non-qualified beneficiaries include estates, charities and most trusts. The problem with naming a non-qualified beneficiary is that money will come out of the IRA faster than it might need to and the beneficiaries will likely pay more in taxes than they would if the account owner hadn’t made the mistake.

The key is that only individuals with quantifiable life expectancies may be qualified beneficiaries. And if a trust qualifies as a designated beneficiary, one has to look to the trust’s individual beneficiaries to determine whose life expectancy will be used for the required minimum distributions.

In our next post, we’ll continue looking at common mistakes with IRA planning.

Source: Marketwatch, “Top 10 IRA-planning mistakes,” Robert Powell, November 29, 2012