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Learn the intricacies of the new IRA distribution rules
Individual Retirement Accounts have lots of fans, but changes in the rules for required distributions are creating confusion. The new rules reduce the size of required minimum withdrawals for many people. In addition, they allow more beneficiaries to extend the life of inherited IRAs based on their own life expectancies. It's the details of how to apply the rules that have left many retirees struggling.
Here are some recent reader questions on the subject that we've attempted to answer with help from IRA expert Ed Slott in Rockville Centre, N.Y.
Q. I am thinking of naming my estate as the beneficiary of my IRA. If the estate has only one beneficiary, can that person stretch IRA withdrawals over many years?
A. Afraid not. An estate's life expectancy is zero.
"We've always said no, but now the IRS made it clear that anyone who inherits through an estate can never be a designated beneficiary," Slott said. Name a person the beneficiary of your IRA if you want the best withdrawal options.
Q. Do the rules for beneficiaries apply only to relatives of the deceased IRA owner or to all beneficiaries of the IRA?
A. The law distinguishes only between spouse and nonspouse beneficiaries. That means there is no difference in treatment if the beneficiary is your brother or your unrelated next-door neighbor.
Q. If the funds of a deceased IRA owner can be distributed to beneficiaries over many years, do they have to remain in an account under the deceased owner's name or can accounts be set up for each qualifying beneficiary?
A. They must remain in the deceased owner's name unless the beneficiary is a spouse.
"If they take the deceased's name off the account, it becomes fully taxable," Slott said.
Each beneficiary could have a separate account in the deceased owner's name. Such split accounts must be set up by the end of the year following the year the IRA owner died.
Q. If funds are withdrawn from a deceased IRA owner's account, do the normal 60-day rollover provisions apply to the beneficiary? Or are there other provisions?
A. Usually the rule is that you have 60 days from the time you take custody of IRA funds to deposit them in another account and maintain their tax-deferred status. Inherited IRAs are an exception.
"If you take it out of one bank and put it into another, it becomes a taxable distribution," Slott said. "A change of investments can only be accomplished by a trustee-to-trustee transfer without touching the money."
The exception to the exception is an IRA inherited by a spouse. Spouses can treat inherited IRAs as their own.
Q. A lot of people are predicting a rise in inflation and a general decline in the stock market. There must be an investment or stocks that will thrive in these times. What do you suggest?
A. For income investors, the U.S. government offers two investments that are designed to increase in value as inflation rises.
The first is Treasury Inflation Protected Securities, also known as TIPS, which are 10-year notes sold in $1,000 increments. The other is the I bond, a variant on the standard U.S. savings bond. Part of the return for both TIPS and I bonds is based on the rate of inflation. TIPS can be bought directly from the government in January and July or through a brokerage any time. U.S. savings bonds are available through banks or directly from the government. More information can be found at www.treasurydirect.gov and www.savingsbonds.gov.
For stock investors, natural resources stocks are a way to hedge against inflation. Industries to consider include gold mining, oil drilling, oil services and forestry. In addition, gold coins are traditionally considered a safe haven in times of high inflation.
If you consider inflation a serious threat, you should have some of these investments in your portfolio. But don't make an all-or-nothing bet in case inflation remains moderate.
Online money map
An explanation of the new rules for IRA distributions and the life expectancy table used to determine distributions can be found at Ed Slott's Web site.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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