Monday, August 24, 1998
Question: I know if you put an IRA in a trust, the trust has only five years to get the money out. Since the new Roth IRA is all tax-free, does the five-year requirement pertain to the Roth?
-- R.S. in Hillsboro
Answer: Barbara Culver, a certified financial planner and co-owner of Cincinnati's Culver-Freeman Group Inc., says post-death distribution rules from any type of IRA are complicated.
In general, Roth IRAs follow the same rules as traditional IRAs with the exception that there are no minimum distribution requirements during the lifetime of the Roth IRA's original owner. When the owner of a Roth IRA dies before age 70 1/2, the Roth IRA account is subject to the same distribution rules that apply to traditional IRAs. Depending upon the beneficiary of the IRA, there are three possible distribution options:
When a surviving spouse is named as the beneficiary of the Roth IRA, the spouse can elect to treat the Roth as his or her own and continue to defer distributions.
If a non-spouse is named beneficiary, distributions must be taken at least as rapidly as the beneficiary's life expectancy. If an estate or non-qualifying trust is named the beneficiary, total distribution must be made by Dec. 31 of the calendar year that marks the fifth anniversary of the original owner's death. One exception to this option is that in certain types of qualifying trusts, the life expectancy of the oldest beneficiary can be used to determine the required minimum distribution period.
The requirements for qualification are: The trust must be valid under current state law; the beneficiary of the trust must be an identifiable individual; and a copy of the trust must be given to the IRA institution.
A mistake that IRAs owners often make is failing to name a contingent beneficiary. If the primary beneficiary dies before the owner, the proceeds typically go to the owner's estate. This forfeits the heirs' chance to defer income and can result in increased income taxes.
-- Compiled by Perry Brothers
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
