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Individual retirement account basics

A traditional Individual Retirement Account (IRA) is an account that has been funded by pretax dollars that are held by a custodian until you reach the age of retirement. With Baby boomers reaching that age, these accounts will become very important in determining when a person can retire and continue to have sufficient assets to live a comfortable life.  Until now,   many people never paid much attention to this account because they knew that they could not use the funds.  Setting aside the fact that these funds have greatly declined in value over the past two years, it is imperative that one understands how these accounts function and what check list should be used to insure that everything with the account is in order.

Structure of the account

This account is in your personal name. The funds are held by a custodian who is the plan administrator. This account has a named beneficiary designation.   Everyone should have a written copy of the beneficiary designation form for each account. Most married individuals have their spouse as the beneficiary. When I ask who the second beneficiary is or a contingent beneficiary they do not know. Be sure to have someone named and also be sure to have written proof of the named beneficiaries.  With all of the banks merging, going out of business and just changing names, your actual documentation can be lost in the shuffle. It is recommended that you contact the custodian of your IRA and ask for proof of beneficiaries.   Determine if your form is complete with a written primary beneficiary and a contingent beneficiary. 

Planning with the IRA account

The primary purpose of the IRA is to provide funds for your retirement years.  It is also important to plan for the best use of the fund if you die without using all of the monies.  Normally the fund will be a rollover account for the benefit of your surviving spouse.  This allows the fund to continue to grow tax deferred until the money is withdrawn over the lifetime of your spouse.  Remember that income tax will have to be paid on this money when it is withdrawn. 

If you have adequate other monies, the IRA is a great planning tool for grandchildren. The law now allows you to defer the distribution of the account over the life expectancy of each grandchild.  If the grandfather passes away with an account for the benefit of a two year old grandchild it will continue over an 84 year period with a tremendous growth for the grandchild in later years. If there is a large age difference then it is often best to establish separate trust shares for each grandchild or group to plan for the age difference. 

Planning for charity

If you want to give money to a charity, a distribution from an IRA is the perfect tool.  When the distribution is made there will be no income tax or estate tax.  All of the money will go to the charity and the government will get nothing. Even a small donation can be given from the IRA and allow for the greatest benefit from your fund 

Using a trust

If you want to give money to younger individuals but still want some control then you will want to have a revocable trust be the beneficiary. There are very definite rules relating to the use of a trust and you will need the assistance of legal counsel to properly plan for this kind of distribution.  The IRA can also be used to fund a credit shelter trust in a basic A-B trust plan but assistance is essential to obtain the desired result. With the large federal credit allowed today the IRA is often a major part of the plan. 

Required beginning date (RBD)

The government requires that you start taking a portion of the fund out each taxable year. This is calculated by determining   the normal life expectancy which is approximately 16 ½ years from the date of the required beginning date.  The required beginning date is April 1st of the year after the year in which you attain the age of 70 ½. Only the government could devise such a plan.  Each year you will be required to remove a percentage so that the fund is exhausted by the end of your life expectancy.  You need to prepare for this event. If you have several accounts you may take all of the distribution out of one of the accounts and leave the other accounts growing for another year. The main concern is income tax and you should always consult with your CPA as to the best plan for distribution. The government has frozen the mandatory distribution requirement for the next two years and is allowing you to retain that amount in your IRA.

401(K)

If your company has maintained a 401(K) for your benefit during your working years it is best to roll over this account into a self directed IRA at retirement. A 401(K) has a few different rules and you need to take all of the above steps and determine if there are any other decisions that need to be made relating to your 401(K) account. You need to do this homework before you retire so that you satisfy any company or government requirements. 

Conclusion

You have worked many years to create and build this nest egg.  It is important that you review with trained individuals initially prior to 59 ½ and again at 70 ½. A wrong decision can create an unnecessary tax and affect your payouts for years. 

Jeff Roth is a partner with David Bacon and associate Jessica Moon of the firm ROTH and BACON with offices in Port Clinton, Upper Sandusky, Marion, Ohio and Fort Myers, Florida.  All members of the firm are licensed in Ohio and Florida.  Mr. Roth’s practice is limited to wealth strategy planning and elder law in both states.  Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to provide information to the public on concepts of law as they pertain to estate and business planning. Jeff Roth can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. (telephone: 419-732-9994) copyright Jeffrey P. Roth 2014.

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