By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management Advisor^SM
Accredited Investment Fiduciary®

As if divorce or death weren’t tough enough, Congress and the Internal Revenue Service do not make the rules that apply to Individual Retirement Accounts any easier in either of these times of distress.  “You don’t know what you don’t know” can come back to financially bite you, as many financial moves, once made, can not be reversed.

Divorce.  When a married couple splits up, so do their assets in most cases.  I was attending a continuing education session at a conference recently where a case study was presented.  A dentist and his wife had recently divorced and she was entitled to half of his $1 million IRA.  Not realizing his options and the IRA rules, the dentist withdrew $500,000 to give to her.  At tax time, he received a 1099-R, which indicates a distribution from a retirement account.  Unbeknownst to him, taking the money out of the IRA and writing her a check constituted a distribution rather than a transfer.  Thus, she received the same $500,000 as she would have had he initiated a direct transfer from his IRA custodian directly to her IRA custodian.  However, because he withdrew the money instead, he had to pay ordinary income taxes on the entire $500,000 in the year it was taken out of his IRA, as well as the 10% federal and his state premature distribution penalties since he was under age 59 ½.  The $500,000 distribution was added as ordinary income on top of his earned income for the year, bumping him into a higher tax bracket.

Death.  It is almost always most beneficial to name your spouse as the primary beneficiary of your retirement accounts.  A spousal beneficiary has the option to inherit the retirement account directly as their own, or as a beneficial IRA.  Which one is optimal for the surviving spouse depends on the ages of the couple upon the IRA owner’s death as well as the surviving spouse’s personal circumstances.  The surviving spouse, as beneficiary, may retitle a beneficial IRA into their own IRA in the future, however, when an inherited IRA is titled into their own IRA, it may not be retitled to a beneficial IRA, so it is best to turn over all stones before making financial moves in this case.  If you are a non-spouse beneficiary, you have the option to “stretch” the tax deferral that was enjoyed by the original account owner.  However, you must take required distributions.  Failing to take your RMD’s will subject you to a penalty of 50% of what the RMD should have been.  Yes, you read that right.  If your RMD should have been $20,000 and you did not take it, you are subject to a $10,000 penalty.  Unlike your own IRA, you may not contribute to an inherited IRA.  Doing so would also subject you to penalties.

IRAs can be powerful tools preparing for as well as navigating through your retirement.  The benefits surrounding IRAs may make the accounts well worth your efforts in building them.  If you do not follow the rules along the way though, the mistakes can be costly.

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or louann.schulfer@lpl.com.  www.SchulferAndAssociates.com
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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