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From Our “Ask a Question” Mailbag: “Can I Withdraw Funds from My Retirement Account for Costs Related to Coronavirus?  Are there any penalties for Coronavirus Related IRA Withdrawals?” Can I Make Penalty-Free Coronavirus Related IRA Withdrawals? On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security […]

The IRA Trust, An Underutilized Estate Planning Tool.

To ensure that your money passes on only to your direct descendants, consider forming an IRA Trust.

All qualified plans (IRA, Roths, 401ks, SEPs, TIAA-CREF, etc.) allow you to name a beneficiary to receive the plan at your death. But, if this person is your child, they will have the chance to defer income tax recognition by converting the plan into an “Inherited IRA”. BUT, with an “Inherited IRA” your child, not you, has the ability to name a beneficiary. And it is likely this beneficiary will be your daughter-in-law or son-in-law rather than your grandchildren.

From our “Ask a Question” mailbag: My only asset is a large individual retirement account (IRA). I am 79 years old and am worried that, in the next few years, I may have to move into assisted living or a nursing home. Can I move my IRA into an Irrevocable Trust to shelter it from creditors?

If you have named your children as beneficiaries of your individual retirement account (IRA), you have likely made a mistake that exposes the IRA to your children’s spouses, to their creditors and to easily avoidable future inheritance and estate taxes. Forming and naming an IRA Trust for your child as the beneficiary easily corrects this mistake.

Congress requires that all qualified retirement plans—including IRAs, SEP-IRAs, 401(k) plans, and 403(b) plans—must allow an IRA Trust to be named as a beneficiary. By doing so, Congress allows you to form an IRA Trust for your child that allows the Inherited plan to remain tax-deferred.

Your IRA is subject to the Pennsylvania Inheritance Tax, which can prove to be a tax trap.

For example, if you leave $100,000 from your IRA to a friend, that gift is subject to the 15% Pennsylvania Inheritance Tax rate. To avoid interest and penalties on the Pennsylvania Inheritance Tax, within 9 months of your death your friend must pay the Commonwealth $15,000. If your friend does not have $15,000 of liquid assets, she may have to remove the $15,000 from the IRA. If she does, this will trigger her to recognize $15,000 of income. If she does not have the liquid assets to pay the income taxes due on the $15,000, she may have to remove the money from the IRA, which triggers even more income taxes.

If you are like most Philadelphians, you are provided the option of participating in a qualified plan program, such as a 401k, 503(b) or TIAA-CREF program. Otherwise, you may have an Individual Retirement Account (IRA) or a Roth-IRA that you have formed and funded yourself. These plans are designed to hold assets tax deferred and earmarked for retirement but, with the exception of a ROTH-IRA, when the funds are removed, the deferred income taxes come due.