Retirement Workshop Recap

Questions from the Retirement Workshop

Retirement Workshop: Disinherit the IRS from Your Retirement AccountsThis past week has been a busy one for us, here at FiAT. In addition to wrapping up another successful week of FLY Sessions at St. Matthews Ward Hall, our July 15 retirement workshop on “Disinheriting the IRS from Your Retirement Accounts” drew a crowd of more than 50 people to the Belmont Library. At the workshop, speaker John Lau of LFS Asset Management discussed the important topics of timing one’s IRA, stretching it over one’s lifetime, the nuances of a Roth IRA, using life insurance as leverage, and beneficiary designation planning. Halfway through the workshop, a round of questions opened up the floor to the attendees, giving them a chance to discuss their own situations, reflect on past decisions, and ask a finance professional about the best course of future action.

Here is a recap of some of those questions:

Are there required minimum distributions (RMD) for an inherited Roth IRA?

Believe it or not, the answer is yes. That is another common mistake that a lot of people make. What usually happens is that under normal circumstances, when you take money out of a Roth IRA and you meet the requirements – the 5-year requirement and age 59-½ requirement – you don’t have to pay any taxes at all when you take distributions, right? So let’s say, now you’re the beneficiary of a Roth IRA account. A loRetirement Workshop Questionst of the time, the thinking is ‘Well, when I take the money out of the Roth IRA, it is not going to be taxable, but I don’t need the money so let’s just leave it in there and I’ll take the money out when I need it.’ Except, the IRS says when you inherit a Roth IRA, you have to take RMD too, and if you don’t, the amount that you don’t take is going to be subject to the 50% penalty. You have to pay 50% penalty on something you don’t have to pay taxes on.

Does an inherited IRA have to be titled as an inherited IRA?

When you inherit an IRA account, the IRA account is going to be retitled. So again, let me use myself as an example. Right now, my IRA is titled John Lau IRA. Now, let’s say I pass on and it’s going to go to my son. So when I pass away and he inherits the IRA account, the IRA is going to be called John Lau (Decedent) IRA for the benefit of [Son’s Name]. That’s how an inherited IRA is going to be titled, and the social security number on the inherited IRA is going to be the beneficiary’s social security number.

But with spouses, it’s simply a rollover, right? For a spouse it’s not inherited, right?

If it is a spousal beneficiary, then the spouse can do 1 of 2 things. 1) They can do a spousal rollover, which is a privilege only for the spouse. Let’s say, for example, that I name my wife as a beneficiary; she can roll it over. What it means is that she can take over the IRA account and treat it as if it had always been her IRA account. However, let’s say that I didn’t name my wife as a beneficiary; instead, I named my son as a beneficiary. My son cannot roll it over. He’s going to have to inherit, and when he inherits he’s going to have to take RMD. 2) Now my wife, on the other hand, instead of rolling it over, can also choose to inherit, keeping it as a beneficiary IRA. But why would she want to do that? It really depends on whether or not she needs the money. So let’s say she needs the money and she’s not yet age 59-½. If you take money out of an IRA account before reaching 59-½, there is still a penalty, and if she rolls it over into her own name and treats it as if it had always been hers, now the age 59-½ requirement applies to her. Now, she pays tax on the early withdrawal and the penalty. So how do you get around that situation? You stay as a beneficiary IRA instead of rolling it over, because a beneficiary withdrawal is not subject to the 10% early withdrawal penalty.

Matthew Lau

Matthew Lau is responsible for creating the curriculum and facilitating the program for the week-long session, as well as helping to market and plan. He is a graduate from Santa Clara University pursuing a career in financial planning.