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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3978
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am 72 years old, working full time, and have a 401K plan

Resolved Question:

I am 72 years old, working full time, and have a 401K plan with my employer. After I pass away, I would like my daughter and my wife to be the equal beneficiaries. Since neither of them works, they do not have any personal IRA plan. I would like them to receive an annual installment from my plan after my death until all the funds have exhausted. How do I set it up so that taxes are paid only once by each beneficiary as she receives the installment?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Customer:

Hi,

Customer:

First thin is to name them both as 50%, primary beneficiaries ... but the rules on taxation are different for a spousal beneficiary and all others (non-spousal beneficiaries)

Customer:

Your wifecan receive the funds into her IRA (this should be done as a "custodial transfer," some call it a trustee to trustee transfer .. and is something that she will have to elect AS the beneficiary ... AND ... spouses can leave funds inside the IRA and not be forced to pay tax for as long as she wishes

Customer :

After I die, 401 K will be moved into other IRA. If both are beneficiaries would they both pay taxes at their share of funds?

Customer:

Again ... "Your wife can receive the funds into her IRA (this should be done as a "custodial transfer," some call it a trustee to trustee transfer .. and is something that she will have to elect AS the beneficiary ... AND ... spouses can leave funds inside the IRA and not be forced to pay tax for as long as she wishes" ... (the money will only be taxed AS she takes it out) ... for your daughter, the rules are different (hang with me here) ....

Customer :

How about the daughter? I want to make sure that the daughter has an equal acces to her share.

Customer:

Your daughter can also receiver her funds into her own BENEFICIAL IRA, but MUST take the funds out (Uncle Sam wan'ts those taxes) either within 5 years of your death OR can elect to take them out over her own life exectancy ... And as your wife's spousal IRA, will be taxed on the funds AS she takes them out of the IRA

Customer:

TH 50% beneficiary designation is what does that

Customer:

How each IRA is treated (Your Wifes' IRA that 50% in it and your daughter's IRA that has 50% in it) come under a different set of tax rules

Customer:

On your 401(k) plan at work there is a beneficiary form

Customer:

THat is where you will leav 50% to your wiand and daughter each

Customer:

After that (your daughter being a little more constrained than you wife about her options) they can access THEIR IRAs ... Again you wife pretty much as she wants ... and your daughter must takes hers out more quickly

Customer :

In case of daughter: if she goes with her own life expectancy but takes more money than the minimum required, would she be penalized?

Customer:

no... because the 59 and 1/2 penalty is waived for all beneficiaries

Customer:

She, AS your wife, WILL be taxed (it's just added to their other income for the year).

Customer :

So, if my daughter is younger than 59-1/2?

Customer:

that's right ... NOT an issue for INHERITED IRA funds

Customer :

Since the funds are from 401K plan, when would it be taxed?

Customer:

If your beneficiaries direct this to be transferred into BENEFICIAL IRA's it is NOT a tabale event ... the dollars stay inside the shell of the IRA, just as if they were keeping them in the 401(k) ... the tax happens AS they distribute the money from their own INHERITED IRAs

Customer:

sorry for the typo ... not a "taxable" event

Customer :

Thanks a lot; I need to sort it out.

Customer:

for example if you wfe OR daughter takes out 10,000 in a given tax year, and they made 50,000 that year, they will pay income taxes on 60,000

Customer :

Thanks, XXXXX XXXXX very good day.

Customer:

VERY Important to be sure that your 401(k) administrator has them on file as 50% beneficiaries.... thist is whre many mess up

Customer:

You're welcome DO check with the 401(k)

Customer:

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer :

How about if I have a living trust and that is the beneficiary; and the beneficiary of the trust are my wife and daughter?

Customer:

For qualified plans you want the beneficiaries to be the individuals ... If the trust is a revocable trust (a pass-through, where everything gets taxed to you anyway, there is no difference_ ... If it's an IRRevocable trust, then the trust will have to pay taxes on it at much higher tax rates

Customer:

Much better to leavie it to them, gives them many more options ... remember NO tax paid until they start pullingthem money ... is stays sheltered

Customer :

so, the best thing will be to change 401k beneficiary from the trust to indivisual account of wife and daughter. after my passing away, the 401 will be moved to two IRA plans, one in each name, and each can withdraw money as they want and pay taxes on it. Right?

Customer:

That's right ... When you pass custodians must handle it this way: They will be given the option to roll it to their own IRA. THEN they can take out an be taxed as they do. (Your daughter, however, will be forced to take hers out and pay the tax either within 5 years OR over life expectancy. Where you wife does not have to at all)

Customer :

What about my house? It is in my name; CA is joint property state; surrently the property is in Trust and beneficiarires are my daughter and wife equally.

Customer:

The reason you might want to leave it to an irrevocable trust is to control more of the distributions yourself, but that comes with special tax rules, can have the effect of either not deferring taxation as much OR even forcing out more money that your daughter (because of her age) wants to

Customer:

On the house ...

Customer:

Is this trust a grantor trust? Or is it irrevocable?

Customer :

grantor

Customer :

I am the grantor and trusty

Customer:

I would change nothing, the heirs will get a step up in tax basis (just as they would if you left it to them individually) there is no Income in Respect of Decent (Income tax to the beneficiaries) as there is with retirement vehicles ... the only tax to be paid will be when they sell, and then your will will get a step up in basis to the fair market value of home on her portion and your daught will get a step up in tax basis on ALL of her portion (WHEN THEY GO TO SELL)

Customer:

and then you "wife" ...

Customer :

I think it all covers for now; I appreciate your help. Excellant.

Customer:

You're welcome

Customer:

Let me know of I can help further

Customer:

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3978
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 4 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
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Customer: replied 1 year ago.

I am not clear about: "my daughter can receive funds into her Beneficial IRA but must take funds out within 5 years of my death" or " can elect to take them out over her own life expectency", what all this means in simpler English.

Expert:  Lane replied 1 year ago.


Sure,

For a beneficiary of an IRA or a 401(k) who is NOT the spouse, the IRS forces the beneficiary to take the money out of their own inherited IRA - which has never been taxed -i n one of two ways (and pay the tax as it comes out of the IRA):


(1) She can take it all out over the first 5 years, after the date of your death.

or

(2) She can take it out over her life expectancy (ising the IRS tables that show her expected life span)




In choice number (1), she can take out any amount she wants, but must get it ALL out within 5 years after your death.

She will pay taxes on the money AS she distributes it from her IRA.

Lets say she takes out 10,000 in the first tax year and has wages or other income that year of 50,000. When she does her taxes, by the following April 15th, she will report gross income of $60,000.




In choice number (2), she will go to these tables: http://www.bogleheads.org/wiki/IRA_Distribution_Tables see how many years the table says she will live and then must start taking the money at that rate.

Lets say, to make the math easy, that the table says she will live 20 years and she has 40,000 in her IRA on the year that you die, shwe will have to start pulling 2000 per year and pay tax on that additional 200 of income each year.




This only applies to non-spouse IRAs. Your wfe does not have to pull any amount out at all, she has the ability to defer that taxation as long as she likes ... and LIKE your daughter, will pay tax only on what she does pull out, for the year that she pulls it.

Also, here's a calculator for calculating the life expectancy distributions for your daughter: http://www.bankrate.com/calculators/retirement/ira-beneficiary.aspx

And here's an excellent article on your issue: https://personal.vanguard.com/us/whatweoffer/ira/inheritediranonspousermd



Let me know if you need more

Lane

Customer: replied 1 year ago.

Let us say my daughter chooses life expectancy table of IRS and by that she can draw $5,000 per year over a period of 20 years. Can she draw amount in excess of $5,000 allowed per year? If yes, is there any penalty?

Expert:  Lane replied 1 year ago.

Yes, she can ALWAYS draw more.

The constraints are designed so that AT LEAST a certain amount is withdrawn and taxed.

She can ALWAYS draw more.

Lane
Customer: replied 1 year ago.


Thanks,

Expert:  Lane replied 1 year ago.



You're positive rating of my answer is thanks enough.

(That's the only way they will pay use here)

Glad to be of help

Lane

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