as beneficiaries. The spouse would be prohibited from making the ownership election and RMDs would be required over the life expectancy of the spouse, thus reducing (the spouse could die before their expectancy) or exhausting the Roth IRA balance altogether. So much for your desire to leave part to the children.
If the Roth IRA owner dies before age 70 1/2, the spouse doesn't have to start the RMDs until the IRA owner would have reached age 70 1/2. Here is another area where the spouse needs to pay attention. If RMDs are not started when required (or less than the required amount is taken out), the penalty tax is a whopping 50% of the difference between what was required and what was withdrawn.
If your desire is to extend the RMDs all the way to the death of your spouse, here is another “heads up”. Let's say you named a trust as the beneficiary of your Roth IRA. Even if your spouse is the sole beneficiary of the trust, the election to have the spouse treat your Roth IRA as their own cannot be made. There technically may be a work-around (a rollover), but why not just set things up right from the start?
A Person Other Than Your Spouse is the Beneficiary
In this case, distributions must be made over the remaining life expectancy of the beneficiary. If there is more than one beneficiary, the life expectancy of the oldest is used. If the beneficiary is a trust with multiple beneficiaries, the oldest beneficiary's life expectancy is also used.
Another caution: If an entity other than an individual is a beneficiary of an IRA (even if an individual is also a beneficiary), the IRA is treated as having no beneficiary. The distribution requirements for an IRA with no beneficiary are outlined below.
Probably the most common scenario involving a “non-person” is a charity. If you name a charity as one of the beneficiaries, the distribution rules are different and may be contrary to your desires. The solution is to roll part of your IRA over to a new one and name the charity as the sole beneficiary.
No Beneficiary
Where no beneficiary is elected, the entire distribution must be made over five years. This five year rule would also apply even if there were a beneficiary and the distributions were not started when the rules dictated they must start.
As I hope you can see, there are several ways to make mistakes which would have the distributions occur in a much different manner than your wishes. These examples are my interpretation of the rules and cannot be relied upon for tax advice. I would recommend sitting down with your financial planner, your and an estate planning attorney to make sure everything is set up properly.
Robert D. Cavanaugh, CLU is a 36 year financial and estate planning veteran and author of the free newsletter, “The Estate Preservation Advisor”. To subscribe and get the free video, “How to Sell Your Life Insurance Policy for More Than the Cash Value”, go to theestatepreservationadvisor.com/freevideo.htm
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