What Happens to an IRA With No Beneficiary Designation

Individual Retirement Accounts (IRAs) with no beneficiary designations may automatically pass to a living spouse or transfer to the IRA owner's estate. In the former case, what happens to an IRA with no beneficiary designation is different due to the legal differences between recipients. Moreover, estates can go through a legal process called probate when no spouse or beneficiary designation exists. Probate is the mechanism by which assets and debt obligations are reviewed by a judicial body and distributed by such.

Until an owner of an IRA gives up right to the funds within an IRA, the value and assets within the IRA remain intact and belong to that owner. According to Vanguard, a large financial services firm, what happens to an IRA with no beneficiary designation may depend on the Custodial Account Agreement. That is to say, since the financial services firm is the custodian of the IRA, the terms within that agreement may specify beneficiaries in the event the owner does not. Vanguards policy on the matter is to transfer first to a spouse and then the owner's estate if no spouse exists.

According to Mary Randolph, J.D., in a book named '8 ways to Avoid Probate', contractual wills can and do take precedence over custodial account agreements despite being relatively infrequently used instruments. In other words, if no beneficiary is listed on the IRA, but the agreement automatically has a contingency beneficiary, a contractual will can override the allocation determined by the account.

In the case of a non-designated spouse, two things can happen to an IRA with no beneficiary designation. Either the funds are received in full or they can be held in an inheritance IRA for tax deferral. The advantage of the latter method is the recipient of the IRA funds has more time to determine a more tax beneficial annuity or method of withdrawal. If an estate becomes the first non-designated beneficiary probate may become a requirement that can prolong the transfer and distribution process in addition to adding legal costs.

A reason individuals assign beneficiary designation to their IRA's is to avoid unforeseen financial circumstances and prevent third parties from determining what will happen to the IRA. Moreover, by assigning IRA beneficiary designations to an IRA, the option for less inheritance tax to paid by the IRAs funds exist in addition to the funds being allocated as wished. Designating beneficiaries is to prevent confusion and other adverse circumstances following the passing of the primary owner.

If no last will and testament exists in addition to having no designated IRA beneficiaries, the court may decide to allocate the IRA to the state. This is more likely to occur in the event no surviving relatives exist or when no clear right to claim the property exists. According to the U.S. Internal Revenue Service (IRS) another stipulation may apply to inherited IRAs. Specifically, the IRS states that individuals may only have five years to withdraw the entirety of the IRAs worth.

Sources:

1. http://bit.ly/brDZoU (Internal Revenue Service: Publication 590)
2. http://bit.ly/96FjfO   (Estate Planning Law Firms)
3. http://bit.ly/c9KnLp (Mary Randolph, J.D.)
4. http://bit.ly/aXj2vw  (Vanguard)

Roth IRAs 101

In the numbers game of managing money, a Roth IRA can be a useful financial instrument to hedge against a possible increase in taxes during one's retirement years and a useful way to invest through a retirement instrument.

• Qualification: Roth IRA's are for employed people or the spouses of employed people. Money acquired through investments do not qualify for income in this case. This is a financial vehicle for working class through the upper middle class as the income limits for opening an account can be no higher than 160K depending on filing status. For individuals and married persons filing separately, the earnings cap is set at $95-$110K with contribution phase out rules starting at 95$K, and for married persons filing jointly $150-160K with contribution phase out starting at $150K.

• Benefits: The benefits of Roth IRA's can include tax free capital gains and/or dividend income so long as the earnings are acquired are through the Roth IRA account. Also, there is no age limit to contribution nor is there a mandatory withdrawal required after a certain age is reached. This type of account can also be a useful hedge against complications in future government social security contributions.

• How to open an account: To open a Roth IRA one can either transfer a traditional IRA into a Roth or establish a new account with a banking institution provided that one is legally entitled to open such an account. Annual contributions can be no more than $4K for persons age 50 or lower and $5K for 51 or older with no age ceiling. Certain rules and restrictions may apply to persons with incomes near the cap range and self employed individuals.

• Tax benefits: The tax benefits of Roth IRA's are back end meaning the money deposited in a Roth is taxed i.e. not deductible on a tax return. However, it is not taxed upon withdrawal and may qualify for a retirement savings tax credit if you're over 20 as of 2007 and your adjusted gross income is less than $50K if married filing jointly or more than $25K filing singly.

Tips on Opening a Roth IRA

As with many financial decisions the choices one makes are best applied to one's own circumstances. If one needs retirement contribution money for living expenses, a family emergency or some other unforeseen event the money contributed to a Roth is subject to taxation and a possible 10% penalty if withdrawn early. In other words, if you're going to need the money don't lock it up.

Secondly, the benefit of a Roth IRA is essentially as a tax hedge and savings regimen. If one has fiscal discipline and can gain a return higher than the tax savings incurred from both a predicted future tax adjustment and the tax savings on investments through the Roth IRA it may be better to choose other financial instruments.

Third, the tax free withdrawal incentive only becomes active at 59.5 years of age and beginning at least the fifth year after initial contribution. The earlier and more one contributes to this account the better the tax savings will be IF taxes rise and/or your income tax bracket lowers after retirement.

In retrospect, one of the best benefits of a Roth IRA is the tax free income within the account. This can be a significant advantage in taxation because money that could earn 10% a year in a non-retirement account that is taxed as short term capital gains loses 10-35% outside of a non-tax sheltered investment vehicle.

To illustrate, if one's taxable income is the 15% tax bracket and acquires $5,000 in capital gains every year for 20 years, those capital gains will be taxed 15% a year or 15%*(5K*20 years)=$1500.00. Had that same money been in a Roth IRA, not only would the earnings be tax free saving $1500.00, the $1500.00, but the $1500.00 could also be used to leverage more investments for a potentially greater gain overall.

Tax Deductibility of IRA Contributions

Tax deductibility of Individual Retirement Accounts (IRA's) is one of the primary features of these types of investments. These benefits can not only save a person and/or organization money, but also lead to greater income potential.

There are several types of IRA's and the tax benefits of each is unique. For individuals the benefits can mean added financial security in older age and for organizations/employers contributing to IRA's , the tax relief can lower payroll tax i.e. money paid to the Government. A brief description of various types of IRA's and the associated tax benefits are as follows:

• Traditional IRA: Contributions to traditional IRA's are tax deductible so long as the amount put into the account complies with federal tax regulations. This tax deduction lowers overall adjusted gross income allowing one to pay less taxes in a tax year or receive a larger tax return. Tax is applied to the contributions and earnings in this type of account at the time of withdrawal. Example: If monthly paychecks are $4,000/month, Monthly contribution from paycheck is $166.676therefore annual taxable income is reduced by $2000 saving $200 at the 10% income tax level.

• Roth IRA: Contributions are made from taxable income, however the withdrawals made after age 59.5 years of age are not taxed and neither are the earnings generated through the Roth IRA. Example: An individual contributes $4000/year to a Roth IRA, that contribution is not deductible, but over 10 years the 4K per year earns 10% each year. Compounded, the 10% tax free earnings yield ($74,124.67-$44,000)=$30,124.67. The $30K in tax free earnings saves one $4500.00 in taxes.

• Employer IRA: Corporations that don't utilize a pension fund may elect to use an employer IRA. These IRA's are established by an employer therefore are tax deductible for them and reduce taxable income for the employee. The affect is generally the same for the employee as taxable income declines in both instances. The contributions and earnings acquired through this type of IRA are tax deferred i.e. taxable upon withdrawal.

• Spousal IRA: Similar to traditional IRA's if contributions are made before the annual IRS mandated deadlines, the contribution is tax deductible. To benefit from a spousal IRA, the filer's tax status should be married filing jointly.

• Keogh: Keogh plans are similar to IRA's but slightly different in the sense they are for the self employed, certain types of small businesses and employees of those businesses. This money can be rolled over into an IRA and contributions are tax deferred until time of withdrawal. Unlike IRA's, Keogh's are not tax deductible because the funds are taken from gross earnings rather than net earnings i.e. pre-taxable income.

IRA contributions vary in terms of maximum amount allowed. Generally the contributions range between $4-6000 per year with contributions in the upper end being reserved for older retirement planners. This contribution amount can have a marginal influence on final tax calculations, but can be all that is needed to lower one's tax bracket from 20% to 15%.

What's more, not all contributions are deductible depending on one's income range. For Roth IRA's and Spousal IRA's incomes over 160K are either non-existent in the former, and not allowed in the latter. While an individual may own more than one IRA there are tax limits on the amount that is deductible i.e. $2000.00/year if filing singly and $4000.00 if married filing jointly.

How to Calculate Monthly Income from Retirement Funds

Retirement income from employer retirement funds, also referred to as retirement account distributions are based on factors such as 1) average income during employment, 2) length of employment 3) retirement age and 4) the retirement fund'(s) formula(s). To calculate how much a monthly annuity payment will be shouldn't be too complicated especially if you are already familiar with details of your retirement plan.

It is important to note however, there are many types of retirement funds that use different calculations to determine final monthly retirement income. This article will discuss calculation of monthly retirement income from employment in terms of 1) types of employment retirement funds, 2) simple ways to calculate retirement income, and 3) retirement fund structure and regulation.

Retirement calculations vary by fund type

Retirement funds include any accounts into which financial contributions are made on a consistent basis. Some employers may offer more than one type of retirement fund. These funds vary in terms of their formulas, investments, policies etc.

Some commonly known retirement funds include 401(k)'s, 403(b)'s, and IRA's. Several additional types of retirement funds exist however. Each of these retirement funds include different contribution, matching, taxation, age and other variables in their calculations.

A few types of retirement plans recognized by the U.S. Department of Labor include the following and are either 1) defined benefit plans or a 2) defined contribution plan:

• 401(k)'s , 403(b)'s and 457(b)'s
• IRA, Roth IRA
• Employee Stock Ownership Plan (ESOP)
• Deferred Retirement Option Program
• Money Purchase Pension Plan
• Cash Balance Plan

Simple ways to calculate retirement income

Calculating retirement income should be fairly easy to calculate closer to retirement than further away. This is because one's total retirement funds are less likely to vary within a year of retirement. Since some retirement plans heavily invest in securities, changes to the annual contribution limit, the fulfilling of that limit and variance in the fund's investments can all lead to variable retirement forecasts. Having said that, the following is a simple way to calculate retirement income based on existing funds, income, age etc.

Step 1: Retirement income determination process

i) Identify the retirement fund, ex: 403(b)
ii) Obtain information on the fund ex: Retirement plan monthly statement
iii) Gather needed quantitative information ex: Total contribution amount
iv) Compute retirement amount based on specific fund formula and rules

Step 2: Retirement income calculation

i) Monthly retirement benefit plan 1 from 457(b):

Average Salary $55, 000 x 20 years of employment x 3%= $33,000/12=$2750 per month

ii) Monthly retirement benefit plan 2 from IRA:

Account value $250,000 at age 70=$250,000/27.4=$9,124.09 per year/12=760.34 per month

Plan 1 plus plan 2=$2750+760.34= $3,510.34 per month.

The above IRA retirement amount is determined by something called a Uniform Lifetime Table that illustrates the minimum amount of distribution that is required after the retiree reaches age 70. The Uniform Lifetime Table is used to simplify the distribution calculations required by IRA regulations. If you have multiple retirement funds, multiple calculations may be required. Some of the key input variables you will need include the following:

• Age
• Qualification date
• Annual contribution amount
• Estimated rate of return ex: 5%
• Percentage contributions if any
• Benefit percentage of average income

Once total distribution amounts are determined, they can be entered into a retirement planner/calculator such as the Bloomberg online retirement planner along with additional information listed in the planner such as earnings on non-distributed funds, inflation effect on value, social security. This planner helps future retirees better determine their retirement contribution budget, retirement needs, and value of retirement fund at projected retirement age.

Retirement fund structure and regulation

Retirement fund structure and regulation boils down to 1) the retirement fund formula, 2) the regulation of the fund and 3) employee variables such as term of employment etc. A good way to find out exactly what your retirement income will be is to ask your human resources representative for information on your retirement plan.

Since different individuals start their retirement plans at different times, with different contributions in varying investments, the range of forecasted monthly cash benefits can also be diverse. The following two points point out the U.S. laws that determine how retirement and pension funds are regulated, and additional steps to take in the case of complexity regarding how to determine monthly income distributions.

i) Federal Regulation of Pension Plans:

* Worker, Retiree, and Employer Recovery Act of 2008
* Pension Protection Act of 2006
• Employment Retirement Income Security Act of 1974 (Codified)

ii) Additional retirement income resources and assistance:

• Consult the Employment Retirement Income Security Act (ERISA)
• Contact the Pension Benefit Guaranty Corporation (PBGC)
• Speak with a Human Resources official
• Meet with a financial planner or adviser
• Acquire the services of an employment lawyer if necessary

Sources:

1. http://www.dol.gov/dol/topic/retirement/typesofplans.htm
2. http://www.irs.gov/retirement/content/0,id=111422,00.html
3. http://www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx
4. http://www.irs.gov/pub/irs-pdf/p590.pdf

How to Set Up an IRA

An IRA is an Individual Retirement account that allows individuals to make annual contributions without taxation until the age of 59 . Detailed information on IRA's can be found in the Internal Revenue Services publications 575 and 590. After this age, withdrawals can be made from the IRA without early withdrawal penalty. Several types of IRA's exist, each with different rules and requirements. There are several steps that one can take to effectively establish, contribute to, and benefit from an IRA. This article will present a guideline by which and IRA can be set up.

Decide if an IRA is the right retirement instrument

Since there are several ways to save for retirement and hedge against taxes, a choice exists as to how one should go about planning for retirement and what investment vehicle(s) to choose. Individual Retirement Accounts can be used in conjunction with other retirement instruments but there is an annual limit to the amount an individual can contribute to an IRA.

Questions to consider when deciding to open an IRA can include how much excess money one has to contribute, what kind of percentage return on Investment to expect, and if the money deposited into the IRA will be needed before retirement. The answers to these and other questions can help one know whether an IRA is practical, feasible and profitable in terms of one's retirement goals.

Differentiate between types of IRA and determine qualification

When thinking about whether or not an IRA may be a good choice it may be a good idea to become familiar with the various types of IRA, if one qualifies to set up an IRA and what the benefits and advantages of different IRA's are. Some IRA's do not allow any early withdrawals whereas others such as the Roth IRA allow withdrawal of money earned on the original investment without penalty. However, unlike regular IRA's, Roth IRA's are not tax deductible but may qualify for a retirement tax credit.

Additional factors that determine whether or not one qualifies for an IRA include annual income, employment status, tax filing status and pre-existence of an IRA in one's name. Generally, to be able to contribute to an IRA, one's income must not be higher than $116K per year if single or $169K if married. One may also not intend to spend the money in an IRA or be very young in which case a Stretch IRA or Children's IRA may be more practical. Distinguishing and ascertaining which IRA is most suitable, may also be assisted by a representative from the financial institution with which one establishes the IRA.

Select an Employer IRA of Financial Institution to Set up the IRA with

Once one has decided if an IRA is a good choice and become familiar with the terminology, rules and types of IRA, a good next step is to research and contact financial institutions. Many financial institutions have IRA plans with various benefits and drawbacks. Some firms may offer convenience, flexible choice of investments, or favorable interest rates. Additionally, one may want to be sure the financial institutions one establishes and IRA through is also financially sound, reputable and suitable enough to be able to facilitate adjustments and/or rollovers of the IRA if need be.

Depending on the type of IRA one has, one may not require the direct assistance of a financial institution in initially setting up the IRA. In such case one may not have to make any contributions until the employment term ends at which point the IRA can be rolled over to another IRA account with a different organization. What's more, some employer funded IRA's have higher annual contribution amounts which may be part of an overall employment benefits package. Speaking with an employer about the IRA can help one understand whether or not one is able to and/or wants to continue funding the IRA through the employer.

Complete Paperwork and Sign

Once one has decided, considered and selected if, what type and which organization one wants an IRA with the next step is to read the IRA terms of service, contractual details and application materials. If the all the information is in accordance with one's knowledge, expectations and goals one may then complete the IRA application and/or paperwork to open the account.

This paperwork may also include privacy disclosures, automatic withdrawal and terms of agreement. After completing the paperwork one may then sign and date it and possibly write a check for the initial contribution amount. After this point the information and funds will be processed by the organization with which the IRA is established and the account them becomes active.

Summary

Individual Retirement Accounts may seem like an easy decision on the surface, but there are actually quite a few regulations, rules and variances that govern and differentiate IRA's. The steps outlined in this article can assist with the process of correctly setting up an IRA. Of significant relevance when opening an IRA, is a careful assessment of one's available funds, future cash flow, financial goals and preferences, and qualification status for opening the IRA.

After all is said and done, if one is not happy with the IRA after having set it up, or if one's situation changes, one may simply withdraw all the funds and close the account with penalty if done so before the pre-established age limit or roll over the IRA into another IRA without penalty.