Skip to content

Archive for May, 2011


Individual Retirement Accounts come in various forms.

First there was the Individual Retirement Account (IRA), in 1998 the Roth IRA was created and in 2006 the Designated Roth 401 (k) (Designated Roth Account) was created. 
There is an avalanche of article discussing IRAs being converted to Roth IRAs, 401(k) accounts being converted to Designated Roth Account, recharacterization of Roth IRAs (changed back to an IRA).
There is more to the decisions than knowing the tax consequences, the contribution limitations, required holding periods, limitations on withdrawals, etc.  Factors such as your health, future tax rates and expected size of your estate, the strength of the economy are examples of additional factors. 
Other factors relate to Designated Roth Accounts.  Not all 401(k) plans are the same.  Not all plan administrators have the same policies and the mechanics will vary among financial institutions.
The Internal Revenue Service has information on its website ( to help in the decision process.  A Roth Comparison Chart is a good starting place.  SEE CHART
Sound, informed and objective guidance from an experience professional is advised.

Back to Top


IRAs for your children

One of the benefits of IRA accounts is the deferral of tax on income and gains in the IRA or other qualified retirement account.  The longer funds are in an IRA the longer the funds can compound tax-free. 

The earlier your children are when they start contributing to their own IRA the better off they will be.  It will help them learn good saving habits that will benefit them throughout their lives.  Alternatively, you can make the contribution for them.  This is permissible even if they spent or saved the income they earned.    

Your children must have earned income to qualify to contribute to an IRA.  Income earned from a part-time or seasonal job qualifies as earned income.  Gifts and allowances are not earned income 

You can pay them a reasonable amount for the services they actually provide in your business, if you are self-employed.  The amount paid will be taxed, if at all, at a lower income tax bracket if you are in a higher income tax bracket than your child.

Your child can contribute in 2011 the lesser of the amount of earned income or $5,000.  If they earned more income they should consider a SEP.  Then they could contribute the lesser of 25% of their earned income or $49,000.   

If you child is a minor check with your financial institution for the procedures required to open an account for a minor.  A parent or legal guardian will need to sign the application.

A Roth IRA should be considered.  Any income earned within the IRA can be withdrawn from the account without tax or penalty if the money is used for certain expenditures such as college or the purchase of a first home.  Distribution will not be taxable if the account has existed for at least 5 years and after age 591/2.

Please check with your advisor for limitations and other special rules that may apply to you or your child,     

Back to Top


Naming retirement plan and IRA benficiaries requires planning

Beneficiaries of Individual Retirement Accounts (IRAs) or a decedent’s plan become the owner of the IRA or account on the death of the participant.  Providers of plans and IRAs use different names for these accounts.  The names include: “inherited IRA”, “beneficiary IRA” or “decedent IRA”.  Some IRA providers use the name of an account that the beneficiary opens to receive the death benefit payable to the beneficiary.

The titling of the account is important.  Ownership of the account determines such matters as when the proceeds must be distributed, and eligibility for certain spousal elections.  Proceeds of the account are taxed as they are distributed.

The title should clearly indicate that the account is inherited, the name of the deceased participant, and the name of the beneficiary (beneficiaries).  Each institution has its own way of reflecting the above information. 

A nonspouse beneficiary may have the account transferred directly to an inherited IRA.  That is, the account is transferred directly between trustees.  If the proceeds are distributed first to a beneficiary, the proceeds will be immediately taxed to the beneficiary.  A spouse has additional alternatives.

Stretching out the payout of the distribution gives the beneficiary the opportunity to defer the taxation of the account.  The naming of your estate or an entity other than an individual as beneficiary will shorten the payout period.    

The above summary does not cover all the alternatives.  The objective is to indicate that naming the beneficiary of a plan or IRA has significant consequences.  The beneficiary designation for your retirement plans and IRAs should be consistent with your overall financial plan.

Back to Top


Revocable living trusts

I have been a proponent of revocable living trusts since law school.  Over the years I have seen how complexities associated with disability and death are reduced.  This type of trust is created by a person and is effective at the time it is created.  This differs from a will that is not effective until after the person dies.  The person who creates the trust (grantor) can terminate or modify it at any time for any reason, provided the grantor is legally competent.  It cannot be modified or changed upon the death or legal incapacity of the grantor. The trust provides a vehicle that continues after the disability or death of the grantor.  Provisions for guardians and custodians are especially beneficial.     

Back to Top