by Joyce L. Franklin, CPA, CFP®

California CPA Magazine March/April 2004

A young woman came to me recently looking for help in sorting out her investments after her mother’s death. Her mother was diagnosed with a terminal illness in 2000 and died in 2002. Unfortunately, the mother’s overall financial planning was inadequate and resulted in major restrictions faced by her heirs.

The rules in this article relate to IRAs and retirement plans inherited by non-spouse beneficiaries; spousal beneficiaries are subject to different rules.

The Starting Point
My client and her sister each inherited 50 percent of three retirement accounts: a traditional IRA, a Roth IRA and a company-sponsored 401(k). The mother was not married at the time of her death. The default rule for withdrawal from these plans by non-spouse beneficiaries is to begin minimum required distributions by Dec. 31, 2003, the year after the account owner’s death. The alternative is to withdraw the balance of the account’s assets within five years of the date of death.

For each option, income tax (but no penalty) will be due on the amount withdrawn from the IRA and 401(k) accounts. Roth IRA distributions are subject to special rules, which are detailed below. We split each of the retirement accounts into two more accounts with the prior custodian, effectively transferring the ownership to my client and her sister. My client complied with the minimum required distribution rules and took the first distribution from her inherited retirement plans in 2003. She will continue to stretch out the retirement plans over her lifetime until the accounts are exhausted.

Calculating IRA Minimum Required Distributions
The beginning MRD for each retirement account is determined by the non-spouse beneficiary’s age in the year after the account owner’s death. In this case, we divided the Dec. 31, 2002 balance in the IRA by 51.4, the factor for a 32-year-old from the Single Life Table [Section 1.401(a)(9)-9, A-1]. My client’s 50 percent share of the IRA balance was $160,000 on Dec. 31, 2002, therefore her first year distribution in 2003 was $3,171.21.

A non-spouse must determine the life expectancy factor from the Single Life Table in the year following death and reduce it by one in each subsequent year. My client’s 2004 factor is 30.2, which is divided into the Dec. 31, 2003 IRA value.

Distributions from the traditional IRA will be taxable at my client’s marginal tax rate. Any after-tax IRA contributions must be allocated proportionately to each distribution and will avoid tax. Generally, the best time to take distributions from an IRA is late in the year to maximize the deferral. But be careful—if distributions are requested too close to Dec. 31, the custodian may not have time to process your request before the end of the year.

The Five-Year Rule for Roth IRAs
There are no minimum distribution requirements on your own Roth IRA. However, a beneficiary must take distributions from an inherited Roth IRA in one of two ways: over the beneficiary’s life, allowing the majority of the account to stay intact and grow tax-free, or within five years of the account owner’s death. Since Roth IRA contributions are not tax deductible, qualified distributions from a Roth IRA will be tax-free. Any funds that remain in the Roth

IRA grow tax-free and there will be no tax on “qualified” withdrawals from the account. Roth IRA distributions are taxed differently than traditional IRA distributions and understanding this rule can save your clients significant dollars. Distributions from a Roth IRA are income tax free if they are “qualified,” which is defined as distributions five years after the contribution was made.

For example, my client’s mom funded her Roth IRA only once, with a contribution in 1999. Withdrawals from this Roth IRA are qualified under the five-year rule if they are made on or after Jan. 1, 2004. The time between the contribution date and the qualified withdrawal date is known as the five-year period.

If a distribution is made from a Roth IRA prior to this five-year period, it is a nonqualified distribution. The ordering rules determining the taxability of nonqualified Roth IRA distributions include:

Participant “regular” contributions are not taxable;
Participant rollover “conversion” contributions are not taxable; and
Earnings on contributions (either regular or conversion) withdrawn during the five-year period are taxable at the beneficiary’s marginal tax bracket.

To summarize, Roth IRA withdrawals during the five-year period avoid tax as long as they are from contributions. After the five-year period, all Roth IRA distributions are tax-free to the beneficiary.

Planning for an Inherited 401(k)
A mistake my client’s mother made before her death was not rolling her 401(k) into an IRA. The 401(k) plan document controls whether or not a non-spouse beneficiary will be allowed to stretch out a retirement plan, and it also controls how the funds will be invested if they are to stay in the plan.

In my client’s case, the plan document specified that non-spouse beneficiaries are allowed to stretch out the 401(k), but that assets must be kept in the plan, limited by the investment elections available to company employees.

For as long as my client’s money remains invested in the plan, she must pay attention to changes in the plan, including investment alternatives offered, as plans change fund selections. My client also must monitor the company’s activities, including mergers, which may take some work since she doesn’t work at the company and has no other ties. At any time, the management of her mother’s former employer may change the 401(k) plan’s investment elections and custodian.

Minimum required distributions from a 401(k) generally follow the rules of traditional IRAs explained above. Money withdrawn from a 401(k) plan will be taxable, however, any post-tax contributions made by the employee can come out tax-free if they were contributed before 1987 and the employer has accounted for pre-1987 and post-1986 after-tax contributions separately. After-tax contributions since 1987 are taxed identically to IRAs because 1987 was the first year that post-tax contributions were allowed to IRAs.

The Case for IRA Rollovers
My client is fortunate. The 401(k) plan could have required that the non-spouse beneficiary take a full withdrawal from the account by the end of the year following her mother’s death. In that case, she would pay tax on the entire account balance when distributed, plus give up the tax benefit of deferring these assets over her lifetime.

Why would company-sponsored retirement plans force non-spouse beneficiaries, such as children, grandchildren and siblings to withdraw the funds soon after a participant’s death? The answer is simple: Because 401(k) plans do not want to be in the custodial business. The employer incurs service costs to maintain each participant’s account. While servicing the employee’s account is an accepted cost of doing business, the employer has no obligation to the employee’s non-spousal beneficiaries.

Retirement account planning is imperative for single individuals. Married couples should plan for the potential for divorce or death of a spouse. As part of your planning checklist, remind clients that they can file a new beneficiary designation—both primary and contingent—on their IRAs and 401(k) plans at any time.

Rolling over a qualified plan to an IRA may not be appropriate for individuals who have high personal liability exposure during their working years. If your clients have a 401(k) account from a former employer, encourage them to roll the assets to an IRA to protect the stretch-out provisions and provide their beneficiaries with greater flexibility.

Joyce L. Franklin, CPA, CFP® is a registered investment advisor and principal of JLFranklin Wealth Planning, a wealth management firm in Marin County. She serves on CalCPA’s Personal Financial Planning Committee and can be reached at

©2004 California CPA Magazine.

xosotin chelseathông tin chuyển nhượngcâu lạc bộ bóng đá arsenalbóng đá atalantabundesligacầu thủ haalandUEFAevertonxosofutebol ao vivofutemaxmulticanaisonbetbóng đá world cupbóng đá inter milantin juventusbenzemala ligaclb leicester cityMUman citymessi lionelsalahnapolineymarpsgronaldoserie atottenhamvalenciaAS ROMALeverkusenac milanmbappenapolinewcastleaston villaliverpoolfa cupreal madridpremier leagueAjaxbao bong da247EPLbarcelonabournemouthaff cupasean footballbên lề sân cỏbáo bóng đá mớibóng đá cúp thế giớitin bóng đá ViệtUEFAbáo bóng đá việt namHuyền thoại bóng đágiải ngoại hạng anhSeagametap chi bong da the gioitin bong da lutrận đấu hôm nayviệt nam bóng đátin nong bong daBóng đá nữthể thao 7m24h bóng đábóng đá hôm naythe thao ngoai hang anhtin nhanh bóng đáphòng thay đồ bóng đábóng đá phủikèo nhà cái onbetbóng đá lu 2thông tin phòng thay đồthe thao vuaapp đánh lô đềdudoanxosoxổ số giải đặc biệthôm nay xổ sốkèo đẹp hôm nayketquaxosokq xskqxsmnsoi cầu ba miềnsoi cau thong kesxkt hôm naythế giới xổ sốxổ số 24hxo.soxoso3mienxo so ba mienxoso dac bietxosodientoanxổ số dự đoánvé số chiều xổxoso ket quaxosokienthietxoso kq hôm nayxoso ktxổ số megaxổ số mới nhất hôm nayxoso truc tiepxoso ViệtSX3MIENxs dự đoánxs mien bac hom nayxs miên namxsmientrungxsmn thu 7con số may mắn hôm nayKQXS 3 miền Bắc Trung Nam Nhanhdự đoán xổ số 3 miềndò vé sốdu doan xo so hom nayket qua xo xoket qua xo so.vntrúng thưởng xo sokq xoso trực tiếpket qua xskqxs 247số miền nams0x0 mienbacxosobamien hôm naysố đẹp hôm naysố đẹp trực tuyếnnuôi số đẹpxo so hom quaxoso ketquaxstruc tiep hom nayxổ số kiến thiết trực tiếpxổ số kq hôm nayso xo kq trực tuyenkết quả xổ số miền bắc trực tiếpxo so miền namxổ số miền nam trực tiếptrực tiếp xổ số hôm nayket wa xsKQ XOSOxoso onlinexo so truc tiep hom nayxsttso mien bac trong ngàyKQXS3Msố so mien bacdu doan xo so onlinedu doan cau loxổ số kenokqxs vnKQXOSOKQXS hôm naytrực tiếp kết quả xổ số ba miềncap lo dep nhat hom naysoi cầu chuẩn hôm nayso ket qua xo soXem kết quả xổ số nhanh nhấtSX3MIENXSMB chủ nhậtKQXSMNkết quả mở giải trực tuyếnGiờ vàng chốt số OnlineĐánh Đề Con Gìdò số miền namdò vé số hôm nayso mo so debach thủ lô đẹp nhất hôm naycầu đề hôm naykết quả xổ số kiến thiết toàn quốccau dep 88xsmb rong bach kimket qua xs 2023dự đoán xổ số hàng ngàyBạch thủ đề miền BắcSoi Cầu MB thần tàisoi cau vip 247soi cầu tốtsoi cầu miễn phísoi cau mb vipxsmb hom nayxs vietlottxsmn hôm naycầu lô đẹpthống kê lô kép xổ số miền Bắcquay thử xsmnxổ số thần tàiQuay thử XSMTxổ số chiều nayxo so mien nam hom nayweb đánh lô đề trực tuyến uy tínKQXS hôm nayxsmb ngày hôm nayXSMT chủ nhậtxổ số Power 6/55KQXS A trúng roycao thủ chốt sốbảng xổ số đặc biệtsoi cầu 247 vipsoi cầu wap 666Soi cầu miễn phí 888 VIPSoi Cau Chuan MBđộc thủ desố miền bắcthần tài cho sốKết quả xổ số thần tàiXem trực tiếp xổ sốXIN SỐ THẦN TÀI THỔ ĐỊACầu lô số đẹplô đẹp vip 24hsoi cầu miễn phí 888xổ số kiến thiết chiều nayXSMN thứ 7 hàng tuầnKết quả Xổ số Hồ Chí Minhnhà cái xổ số Việt NamXổ Số Đại PhátXổ số mới nhất Hôm Nayso xo mb hom nayxxmb88quay thu mbXo so Minh ChinhXS Minh Ngọc trực tiếp hôm nayXSMN 88XSTDxs than taixổ số UY TIN NHẤTxs vietlott 88SOI CẦU SIÊU CHUẨNSoiCauVietlô đẹp hôm nay vipket qua so xo hom naykqxsmb 30 ngàydự đoán xổ số 3 miềnSoi cầu 3 càng chuẩn xácbạch thủ lônuoi lo chuanbắt lô chuẩn theo ngàykq xo-solô 3 càngnuôi lô đề siêu vipcầu Lô Xiên XSMBđề về bao nhiêuSoi cầu x3xổ số kiến thiết ngày hôm nayquay thử xsmttruc tiep kết quả sxmntrực tiếp miền bắckết quả xổ số chấm vnbảng xs đặc biệt năm 2023soi cau xsmbxổ số hà nội hôm naysxmtxsmt hôm nayxs truc tiep mbketqua xo so onlinekqxs onlinexo số hôm nayXS3MTin xs hôm nayxsmn thu2XSMN hom nayxổ số miền bắc trực tiếp hôm naySO XOxsmbsxmn hôm nay188betlink188 xo sosoi cầu vip 88lô tô việtsoi lô việtXS247xs ba miềnchốt lô đẹp nhất hôm naychốt số xsmbCHƠI LÔ TÔsoi cau mn hom naychốt lô chuẩndu doan sxmtdự đoán xổ số onlinerồng bạch kim chốt 3 càng miễn phí hôm naythống kê lô gan miền bắcdàn đề lôCầu Kèo Đặc Biệtchốt cầu may mắnkết quả xổ số miền bắc hômSoi cầu vàng 777thẻ bài onlinedu doan mn 888soi cầu miền nam vipsoi cầu mt vipdàn de hôm nay7 cao thủ chốt sốsoi cau mien phi 7777 cao thủ chốt số nức tiếng3 càng miền bắcrồng bạch kim 777dàn de bất bạion newsddxsmn188betw88w88789bettf88sin88suvipsunwintf88five8812betsv88vn88Top 10 nhà cái uy tínsky88iwinlucky88nhacaisin88oxbetm88vn88w88789betiwinf8betrio66rio66lucky88oxbetvn88188bet789betMay-88five88one88sin88bk88xbetoxbetMU88188BETSV88RIO66ONBET88188betM88M88SV88Jun-68Jun-88one88iwinv9betw388OXBETw388w388onbetonbetonbetonbet88onbet88onbet88onbet88onbetonbetonbetonbetqh88mu88Nhà cái uy tínpog79vp777vp777vipbetvipbetuk88uk88typhu88typhu88tk88tk88sm66sm66me88me888live8live8livesm66me88win798livesm66me88win79pog79pog79vp777vp777uk88uk88tk88tk88luck8luck8kingbet86kingbet86k188k188hr99hr99123b8xbetvnvipbetsv66zbettaisunwin-vntyphu88vn138vwinvwinvi68ee881xbetrio66zbetvn138i9betvipfi88clubcf68onbet88ee88typhu88onbetonbetkhuyenmai12bet-moblie12betmoblietaimienphi247vi68clupcf68clupvipbeti9betqh88onb123onbefsoi cầunổ hũbắn cáđá gàđá gàgame bàicasinosoi cầuxóc đĩagame bàigiải mã giấc mơbầu cuaslot gamecasinonổ hủdàn đềBắn cácasinodàn đềnổ hũtài xỉuslot gamecasinobắn cáđá gàgame bàithể thaogame bàisoi cầukqsssoi cầucờ tướngbắn cágame bàixóc đĩaAG百家乐AG百家乐AG真人AG真人爱游戏华体会华体会im体育kok体育开云体育开云体育开云体育乐鱼体育乐鱼体育欧宝体育ob体育亚博体育亚博体育亚博体育亚博体育亚博体育亚博体育开云体育开云体育棋牌棋牌沙巴体育买球平台新葡京娱乐开云体育mu88qh88