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When it comes to IRAs, beneficiaries and taxes, things can get downright confusing. Since I’ve received many questions from clients regarding these three subjects over the years, I thought it would be beneficial to address some of the most common concerns.

1. The Spousal Beneficiary 

If your spouse is your sole beneficiary and chooses to remain so instead of rolling over your IRA, then he or she must begin taking RMDs (required minimum distributions) by whichever is later: Dec. 31 of the year the IRA owner (you) would have turned 70 ½; or Dec. 31 of the year following the IRA owner’s death.

But what if your spouse is significantly older than you and dies first? In this case, if your spouse was to pass away at age 62 and you did not do a spousal rollover to your own IRA, then you would have the option of waiting until he or she would have been age 70 ½ before you had to start taking death distributions over your single life expectancy.

The good news is if you continue to take on the beneficiary title, you can put off having to take RMDs on the IRA funds your spouse designated for you. The only task you must complete in order to implement it is establish the IRA as a properly titled inherited IRA.

How do you do that? It’s simple. In the year prior to when your spouse would have turned 70 ½, roll his/her IRA over to an IRA in your own name. By doing this, you’re allowing your own beneficiaries to stretch distributions over their life expectancies after you pass away.

2. The Deceased Relative Beneficiary

The following scenario is another one I have encountered: A person is the beneficiary of an IRA his recently deceased child set up. That person in turn establishes multiple IRA accounts with other family members as beneficiaries. When the original beneficiary passes away (at an age above 70 ½), his family members should be aware of the following:

—Each family member is free to reinvest his/her inherited IRA in either another IRA or an annuity. As a general rule, beneficiaries can change investments within the inherited IRA at any time. If the investments they choose are at a different financial institution, however, the inherited IRA funds must be transferred to an inherited IRA with the new institution.

— Even if the family members are under age 70½, they must take RMDs using their deceased relative’s remaining single life expectancy.

3. Reporting Contributions and Rollover Deposits

If you are a trustee of an IRA, you must report all contributions and rollover deposits from that account to the IRS using Form 5498. You will receive a copy of that form by the end of May 2015 to use for all 2014 contributions or rollovers.

Some people have run into an issue where their tax software won’t allow them to input the entire amount rolled over as a contribution. Don’t get frustrated—this is normal, and you won’t have to pay taxes on money you did not have in use.

Simply enter the contribution amount as a 60-day rollover. The amount on the 1099-R should be entered on line 15a of the 1040, and on 15b you should enter zero (assuming you have rolled over the entire amount). Then a letter “R” should be entered on line 15b to inform the IRS of your rollover. Double check with a tax professional to ensure you are correctly reporting a tax-free rollover on your federal income tax return. When things get complicated, it’s better to be safe rather than sorry!

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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