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December 7, 2012

IRA planning includes and understanding of what can go wrong.

Robert Powel summarized “…Top IRA-planning mistakes” created by Robert S. Keebler in his Nov. 29th and Dec. 5th column .  His column appears in the Market Watch, The Wall Street Journal. Mr. Keebler is a noted authority on IRAs and frequently lectures on IRAs and related topics.

Following are the highlights.
1. Failure to make timely Required Minimum Distributions (RMD).  There is a 50% penalty on the amount not timely paid.  A common mistake is not to aggregate all your IRAs when calculating the RMD.  Once you reach 70 1/2 make sure you understand the rules.

2. Generally you should name an individual (a qualified designated beneficiary) and not an estate or trust as beneficiary.  A qualified designated beneficiary has a longer period to receive the funds from the IRA. Spreads out the distribution over a longer time period allowing the funds to grow tax-free for a longer period and the amount taxed in any year is less.  Usually this results in less tax.  This applies to your primary and contingent beneficiaries.

3. Unnecessarily accelerating IRA distributions is another mistake to avoid.  There are times when distributions should be accelerated.  Available loses and higher future income and/or taxes are to common examples.

4. Failure to properly title inherited IRAs is another planning mistake.  This could cause the entire account to be taxed in one year substantially increasing taxes.

5. Failure to meet the requirements when a trust is named as a primary or contingent beneficiary.  In the right circumstances a trust may be appropriate.  This is an exception to the general approach not to name a trust (see 2. above). Trust may provide needed protections, controls, management and planning.  An experienced professional should be involved to make sure the requirements are met.

6. Make sure that any rollover of an IRA is completed within 60 days.  Failure to meet this requirement could result in taxation of the amount rollover.  If you are younger than 59 1/2 you could be subject to a 10% penalty.

7. Understand the surviving spouses option of treating the inherited IRA as their own or rolling the IRA assets into their own IRA.  If the funds will be needed by the surviving spouse and the surviving spouse is younger than59 ½ it may be best to treat the IRA as an inherited IRA.

8. IRA assets can be accesses prior to age 59 ½ if taken as a series of equal periodic payments.  Failure to meet the requirements can result in the 10% early withdrawal penalty plus retroactive interest.

9. Do not deal directly or indirectly with the IRA assets.  This would be a prohibited transaction.  The IRA would become taxable and various penalties could apply (10%, 15% and 100%).

10. Br aware borrowing, hedging and similar transaction in an IRA.  These can result in unrelated taxable income that is taxable.

There are many technical requirements relating to IRAs.  Failure to follow them could unnecessarily increase the tax you or your heirs will have to pay.  Each custodian has its own requirements and restrictions.  Planning requires an understating of the tax ramifications and the custodians terms on its IRAs.

The above is not intended as a complete discussion of the requirements, restrictions, exemptions, etc.  The discussion is to highlight some of the planning that can maximize the benefits of IRAs.

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