Formerly known as First Trust Company of Onaga
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Frequently Asked Questions

General

  • Who is Mainstar Trust?

    Mainstar Trust is a limited purpose trust company, chartered under the laws of the state of Kansas. Since 1978, Mainstar Trust has specialized in providing quality non-discretionary custodial services for self-directed IRAs. Prior to 2016 Mainstar Trust was known as First Trust Company of Onaga.

  • What are your hours?

    Our Customer Service Department is available from 8:00am to 4:30pm Central time. Mainstar Trust observes the same holiday schedule as the Federal Reserve Bank.

  • Secure Files

    Will Mainstar Trust accept documents using the cloud?

    Mainstar Trust accepts documents sent via secure file sharing websites. However, Mainstar Trust is not responsible for the security of the documents.

  • E-Sign Forms

    What is an E-Sign form?

    An E-Sign form allows for electronic signatures, rather than signing in ink.

  • Identity Questions for E-Signing

    Why do I have to answer identity questions for some E-Sign forms?

    Certain E-Sign forms require additional security to protect you from fraudulent transactions.

Account Information

Forms

Taxes

  • Why do I get a 1099-R Tax Form?

    The IRS requires an IRA custodian to report all distributions made from an IRA or Roth IRA annually. The IRA custodian reports the distributions made from an IRA for the prior year on Form 1099R. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA. All of the codes are explained in the instructions for recipients on Form 1099-R. The form is sent to the recipients of the distributions by January 31 and to the IRS by February 28 (or March 31 if filed electronically).

  • Why do I get a 5498 Tax Form?
    The IRS requires a custodian to report the fair market value of an IRA (Traditional or Roth) and the contributions made to those IRAs annually. The IRA custodian reports this information to the accountholder and the IRS on IRS Form 5498. The form reports the type of IRA, contributions made during and for the tax year, and the IRA's fair market value at the end of the tax year. A copy goes to the IRA owner and the IRS. IRA-to-IRA transfers are not reportable. The form is sent to the IRA owner and IRS by May 31.
     

     

SEP Plans

  • What is a SEP plan?

    This is a type of retirement savings plan for a business that allows the business to make retirement savings contributions for its own employees. Then every eligible employee can set up a traditional Individual Retirement Account to receive the employer SEP contributions.

  • What are the benefits of a SEP plan?

    This type of plan is easy set up, simple to oversee, and reasonably priced compared to other types of retirement plans, such as 401(k). For an SEP plan there are no compliance tests and filing annual reports with the IRS is not mandatory for employers.

  • Can any employer establish a SEP plan?

    Yes, any type of employer, including a self-employed individual, can establish an SEP.

  • How do I establish an SEP plan?

    There are three steps to establishing an SEP plan: 

    1. The employer signs a written SEP plan document then the IRS offers a free SEP agreement (Form 5305-SEP). This agreement can be used to adopt the SEP plan. Custodians and IRA trustees also provide SEP plan documents.

    2. The employer then has an obligation to notify the employees that the SEP plan has been established. The employer should also provide them with information about the SEP plan.

    3. Eligible employees must then set up a traditional IRA that will receive the contributions. (SEP plan contributions cannot be made to a Roth IRA.)

  • What is the deadline to establish a SEP plan?

    Up until the employer’s tax return deadline, including extensions is when an employer can establish a SEP plan. For example, if a sole proprietor wanted to make a SEP plan contribution for 2017 they would have until their tax return deadline in 2018 to set up the SEP plan and make a 2017 contribution.

  • Which employees do I need to cover?

    For an SEP plan you must cover employees who have:

    - Attained age 21,

    - Worked for your business for at least 3 out of the last 5 years

    - Received at least $600 in compensation for the whole year

    You can also choose to apply less restrictive eligibility requirements.

  • Are there employees I can exclude from my SEP plan?

    When it comes to excluding employees from an SEP plan, employees who are covered by a collective bargaining agreement OR who are nonresident aliens with no U.S. source income can be excluded. This is also along with the employees who haven’t met the eligibility requirements.

  • How much can I contribute to a SEP plan?

    You and each employee can contribute up to 25% of compensation or $54,000, whichever is less. Generally, you must contribute the same percentage of compensation for each eligible employee and employer contributions for this plan are tax deductible on your business tax return. 

  • Am I required to make a SEP plan contribution every year?

    No, you are not required to make a SEP contribution every year. You can also vary the amount you choose to contribute each year.

  • Does the SEP plan limit the amount I can contribute to my IRA?

    No, having an SEP plan doesn't affect the ability to make annual contributions to a traditional or Roth IRA. Additonally, to your SEP contributions, you can make traditional or Roth contributions of up to $5,500, plus a $1,000 catch-up contribution if you are 50 years of age or older. By participating in a SEP plan it may affect your ability to take a tax deduction for a traditional IRA contribution (depending on your income.)

  • When can I take money out of my SEP IRA?

    You are able to take distributions from your IRAs, even SEP contributions, at any time. Although, the distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½.

Individual 401(k) Plans

  • What is an Individual 401(k) plan?

    An Individual 401(k) plan is a retirement savings plan adopted by a business that allows the business owner to make retirement savings contributions. This plan is sometimes referred to as an “owner-only” 401(k) plan. This plan is designed for businesses with no employees.

  • What are the benefits of an Individual 401(k) plan?

    The benefits of an Individual 401(k) plan is that business owners can make large annual contributions. This is because there are no employees, therefore no nondiscrimination tests and employers are not required to file annual reports with the IRS until the plan reaches $250,000 in assets. Both pre-tax and Roth (after-tax) contributions are acceptable in Individual 401(k) plans.

  • Can any employer establish an Individual 401(k) plan?

    Individual 401(k) plans are to be used only by businesses with no employees. The business may be structured as a sole proprietor, partnership, or corporation.

  • How do I establish an Individual 401(k) plan?

    The employer must sign a written plan document that has been approved by the IRS to establish an individual 401(k). The IRS does not offer free Individual 401(k) plan documents, but most 401(k) service providers offer 401(k) plan documents.

  • What is the deadline to establish an Individual 401(k) plan?

    The Individual 401(k) plan document must be signed by the last day of your tax year. For example, for a calendar-year employer, this means the document must be signed by December 31 to make contributions for that year.

  • How much can I contribute to an Individual 401(k) plan?

    You can defer up to $18,000 of your compensation into the plan, plus an additional $6,000 catch-up contribution if you are the age of 50 years or older.

    Most Individual 401(k) plans are designed to also allow profit sharing contributions in an amount that can vary from year to year, but the max profit sharing contribution is 25% of compensation. Total deferrals and profit sharing contributions for a business owner can reach $54,000, plus an additional $6,000 catch-up contribution if they are age 50 or older.

  • Does the Individual 401(k) plan limit the amount I can contribute to my IRA?

    Having an Individual 401(k) plan does not affect the ability to make annual contributions to a traditional or Roth IRA. Additionally, to your Individual 401(k) plan contributions, you can make traditional or Roth IRA contributions of up to $5,500 plus an additional $1,000 catch-up contribution if you are 50 years or older. Although, participating in the Individual 401(k) plan may affect your ability to take a tax deduction for a traditional IRA contribution, but it depends on your income.

  • When can I take money out of my Individual 401(k) plan?

    The funds cannot be distributed until you reach age 59½, die, become disabled, or terminate the plan for an Individual 401(k). Although, Individual 401(k) plans can permit hardship distributions and loans.

  • Are there special employer reporting requirements for an Individual 401(k) plan?

    No, there are no IRS filing requirements until an Individual 401(k) plan reaches $250,000 in assets, this is unless the plan is terminated. Each year when the plan reaches its $250,000 threshold, the business will need to file IRS Form 5500 and an annual information return by the end of the seventh month following plan year end.

  • What if I hire employees after the plan is established?

    An Individual 401(k) plan is designed for a business with no employees. If you hire employees, you must operate your plan according to the traditional 401(k) plan rules.

SIMPLE IRA Plans

  • What is a SIMPLE IRA plan?

    A SIMPLE IRA plan stands for Savings Incentive Match Plan for Employees. It is a retirement savings plan adopted by a business that allows both employers and employees to make retirement savings contributions. Each eligible employee sets up a SIMPLE IRA to receive the plan contributions.

  • What are the benefits of a SIMPLE IRA plan?

    A SIMPLE IRA plan is easy to set up, simple to over see, and reasonably priced compared to other types of retirement plans. There are also no compliance tests and employers are not required to file annual reports with the IRS. For this type of plan, employees share the responsibility of funding the plan with their employers.

  • Can any employer establish a SIMPLE IRA plan?

    Any type of employer, including a self-employed individual, can establish a SIMPLE IRA plan, but the employer must have 100 or less employees. When considering the 100-employee limit, employers must count individuals employed by the business during the previous calendar year who earned $5,000 or more. Also, employers using a SIMPLE IRA plan are restricted from having any other type of employer-sponsored retirement plan.

  • How do I establish a SIMPLE IRA plan?

    Establishing a SIMPLE IRA plan requires three steps:

    1. The employer must sign a written SIMPLE IRA plan document. The IRS offers these free to use to adopt the plan. Custodians and IRA trustees also provide SIMPLE IRA plan documents.

    2. The employer is obligated to notify each eligible employee that the SIMPLE IRA plan has been set in place and also provide them with information about the plan.

    3. Each employee that is eligible must set up a SIMPLE IRA that will receive the contributions.

  • Can I require all employees to open a SIMPLE IRA with the same IRA custodian or trustee?

    Establishing the SIMPLE IRA plan with a document that names a designated financial institution (DFI), all contributions will be made to SIMPLE IRAs held at that specific institution. If the document does not specify a DFI, employees can establish their SIMPLE IRAs at any financial institution they choose.

  • What is the deadline to establish a SIMPLE IRA plan?

    You can set up a SIMPLE IRA plan any time between January 1 and October 1 in the year you first adopt the plan. For example, an employer that wants to make a SIMPLE IRA plan contribution for 2018 would generally have until October 1, 2018, to set up the SIMPLE IRA plan.

  • Which employees do I need to cover?

    Your SIMPLE IRA plan must cover all employees who:

    - Have earned $5,000 or more in compensation in any 2 preceding calendar years

    - OR are reasonably expected to earn that much in the current year

    You can also choose to apply less restrictive eligibility requirements.

  • Are there employees I can exclude from my SIMPLE IRA plan?

    You can exclude employees who are covered by a collective bargaining unit OR who are nonresident aliens with no U.S. source of income. Also excluding employees who haven’t met the eligibility requirements.

  • How much can be contributed to a SIMPLE IRA plan?

    Each year, employees can defer up to $12,500, plus an additional $3,000 catch-up contribution if they are 50 years of age or older.

    An employer is required to make either a matching contribution (dollar-for-dollar up to 3% of salary), or a nonelective contribution (2% contribution for all eligible employees). The 3% matching contribution can be reduced to as low as 1% for 2 out of every 5 years. On your business tax return, employer matching or nonelective contributions are deductible.

  • Does the SIMPLE IRA plan limit the amount I can contribute to my IRA?

    A SIMPLE IRA plan doesn't affect your ability to make annual contributions to a traditional or Roth IRA.

    Additionally to your SIMPLE IRA contributions, you can make traditional or Roth IRA contributions of up to $5,500, plus a $1,000 catch-up contribution if you are 50 years or older. By participating in a SIMPLE IRA plan it may affect your cabability to take a tax deduction for a traditional IRA contribution (depending on your income.)

  • When can I take money out of my SIMPLE IRA?

    For a SIMPLE IRA, you can take distributions including employer matching or nonelective contributions, at any time. Typically, the distribution will be included in the taxable income in the year of the distribution, but may be subject to a 10% early distribution penalty – if you are not yet age 59½.

Health Savings Account (HSA)

  • What is a Health Savings Account (HSA)?

    A Health Savings Account (HSA) is a tax-advantaged custodial account, similar to an IRA, that may be established by an individual who is covered by a high deductible health plan (HDHP). HSAs are used to accumulate savings to pay for current and future medical expenses, and to supplement retirement savings.

  • What is a high deductible health plan (HDHP)?

    A high deductible health plan (HDHP) is a health insurance plan that typically charges lower premiums than traditional full-coverage health insurance, but requires a higher deductible (the amount of medical expenses the individual must pay out-of-pocket before insurance will cover expenses). Individuals covered by an HDHP may save in an HSA to help pay for the medical expenses incurred before the insurance covers their expenses.

    To be paired with an HSA, an HDHP must contain certain limits. It cannot cover medical expenses (with exceptions for preventive care and certain other limited coverage) until at least the minimum deductible has been reached, and must limit the amount of out-of-pocket expenses that the individual must pay.

    HSA-Eligible High Deductible Health Plan Limits

    Self-only coverage

    Family coverage

    Minimum deductible

    $1,300 (2017)

    $2,600 (2017)

    $1,350 (2018)

    $2,700 (2018)

    Maximum out-of-pocket expenses
    (deductibles, co-payments, & other
    amounts, excluding premiums)

    $6,550 (2017)

    $13,100 (2017)

    $6,650 (2018)

    $13,300 (2018)

  • What are the benefits of an HSA?

    An HSA is easy to establish and provides the HSA owner with flexibility and control over contributions, investments, and distributions. HSAs offer a triple tax benefit:
     

    1. HSA contributions are tax-deductible.
    2. Earnings in the HSA grow tax-deferred. 
    3. HSA distributions are tax-free if used to pay for qualified medical expenses.


    You may accumulate money in an HSA from year to year, like an IRA. It is your account and is not tied to your employer. You can continue taking tax-free qualified distributions from your HSA even if you no longer participate in an HDHP. These characteristics make HSAs useful not only for paying current medical expenses but also for saving for medical and other expenses that may arise in retirement.

  • Can anyone establish an HSA?

    To establish and fund an HSA, you...

    Must be covered by an HDHP as of the first day of the month
    Cannot also be covered by a non-HDHP health plan
    Cannot be enrolled in Medicare
    Cannot be claimed as a dependent on another person’s tax return

  • How do I establish an HSA?

    To establish an HSA, you must sign an HSA plan agreement with an HSA custodian. Banks, life insurance companies, mutual fund companies, brokerage firms and other financial institutions that offer IRAs can act as an HSA custodian.

  • How can I invest my HSA?

    An HSA may be invested in the same type of investment options permitted in an IRA, but not all HSA programs offer a broad range of investment options. A Mainstar HSA may be invested in mutual funds or any other type of investment that you would choose for your Mainstar self-directed IRA.

  • What is the deadline to establish and contribute to an HSA?

    You can establish an HSA at any time you’re eligible to contribute. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the HSA and make the contribution. To take a tax-free qualified distribution to pay medical expenses, the HSA must be established before the medical expense was incurred.

  • Who can contribute to my HSA?

    In addition to the contributions you make as the HSA owner, some employers also choose to make HSA contributions to their employees’ HSAs.

    You may take a tax deduction for any HSA contribution you make to your HSA. HSA contributions made by your employer are deductible by your employer.

  • How much can be contributed to my HSA each year?

    The maximum contribution allowed each year depends on the type of HDHP coverage you have, your age, and how many months during the calendar year you are eligible to contribute to an HSA.


    If you are eligible for all 12 months of the year and have self-only coverage:

    Contribution limit for 2017 – $3,400
    Contribution limit for 2018 – $3,450


    If you are eligible for all 12 months of the year and have family coverage:

    Contribution limit for 2017 – $6,750
    Contribution limit for 2018 – $6,900


    If you are age 55 or older, you may also make a catch-up contribution of $1,000 per year.

    If you are HSA-eligible for only a portion of the year, you must prorate your contribution limit for the number of months you are eligible. For example, if you were covered by an HDHP for 4 months of the year, you may contribute 4/12 of the maximum contribution limit for the type of coverage you had.


    HSA contributions made by your employer count towards your annual limit.

  • Am I required to make an HSA contribution every year?

    You are not required to make an HSA contribution each year, and you can vary the amount you choose to contribute each year.

  • What if I contribute too much to my HSA in a year?

    If you contribute more to your HSA than you are eligible for in a year, you generally have an excess contribution. Excess contributions are not deductible and must be corrected. To correct the excess, you must remove the excess contribution plus any related investment earnings by your tax return due date, including extensions. Only the earnings are taxable if the excess contribution is removed timely. If an excess contribution is not removed, a 6% penalty applies for each year the excess remains in the HSA.

  • Can I make contributions to my HSA other than annual contributions?

    You may directly transfer assets from one HSA to another or from an Archer Medical Savings Account (MSA) to an HSA. You may also take a distribution from your MSA and HSA accounts and roll those distributions to an HSA. Rollovers must be completed within 60 days, and only one rollover is allowed in a 12-month period.

  • When can I take money out of my HSA?

    You may choose to take a distribution at any time. A distribution that is used to pay for unreimbursed qualified medical expenses is tax-free—even if you, your spouse or your dependent who incurred the expense is no longer covered by the HDHP or is not an HSA-eligible individual. With tax deductible contributions, tax-deferred earnings, and tax-free qualified distributions, HSA money may never be taxed. See IRS Publication, 502, Medical and Dental Expenses, for a list of qualified medical expenses (www.irs.gov).

    HSA distributions that are not used to pay for qualified medical expenses must be included in your taxable income for the year and are subject to an additional 20% tax. The 20% tax does not apply to distributions made after your death, disability, or attainment of age 65. This means that you may build up your HSA balance to help pay for medical expenses in retirement, and if you want to use the money for other things after age 65, you may take distributions without the additional 20% tax.

  • What happens if I die before depleting my HSA assets?

    Any remaining balance in your HSA will become the property of your named beneficiary when you die. If your spouse is your beneficiary, the HSA will be treated as your spouse’s own HSA. If someone other than your spouse is the beneficiary, the HSA stops being an HSA as of the date of death. The beneficiary must include the fair market value of the assets in their taxable income for the year. Death distributions are not subject to the additional 20% tax. 

Roth IRA Beneficiary

  • I inherited a Roth IRA. What should I do first?
      1. Understand your options – When you inherit a Roth IRA following the Roth IRA owner’s death, federal tax laws require that you distribute the account balance within a certain time frame. The laws provide a few payment options. The financial institution where the Roth IRA is located (Roth IRA custodian) may have more restrictive policies than what is permitted under federal law, so you will want to contact the Roth IRA custodian to confirm your options. Depending on the dollar amount and the types of investments in the Roth IRA, you may also want to seek the advice of a financial advisor or tax professional before you make any decisions.

     

      2. Provide a death certificate – Before you can withdraw money from the Roth IRA, you or the personal representative of the Roth IRA owner’s estate will need to provide a certified death certificate to the Roth IRA custodian.

     

      3. Meet the deadline – Under the tax laws, you have until December 31 of the year following the year the Roth IRA owner died to take your first payment or provide instructions regarding how you want to take payments from the Roth IRA. The Roth IRA custodian may impose other deadlines.
  • What payment options do I have?

    You can always take payments more rapidly, but if you decide to leave the money in the inherited Roth IRA long-term, you must take out a minimum amount each year. Spreading payments over multiple years allows the assets to grow tax-free for as long as possible. How long you have to deplete the account depends on whether you are a spouse or a non-spouse beneficiary.  

     

    ROTH IRA DISTRIBUTION OPTIONS

     

    For spouse beneficiaries

     

    For non-spouse beneficiaries

    5-year rule

     

    5-year rule

    Life expectancy payments

     

    Life expectancy payments

    Treat Roth IRA as own

     

     

  • What is the 5-year rule?

    Under the five-year payment option, you can withdraw any amount each year, or none, but you must deplete the IRA by the end of the year containing the fifth anniversary of the Roth IRA owner’s death.

    Although the rules for traditional IRAs do not permit the five-year payment option if the traditional IRA owner died after his or her required beginning date, the five-year payment option is always available for Roth IRA beneficiaries, regardless of the Roth IRA owner’s age at death.

     

    ► EXAMPLE

     

    Assume your Aunt Sally died on July 1, 2017, at age 68, and named you as beneficiary of her Roth IRA. If you elect the five-year rule payment option, you may take distributions at any point during the five years following Sally’s death as long as you deplete the IRA by December 31, 2022 – the year containing the fifth anniversary of Sally’s death.  

  • What are life expectancy payments?

    Under the life expectancy payment option, you must withdraw a minimum amount each year. (You can always withdraw more if you want.) These payments must begin by December 31 of the year following the year the Roth IRA owner died. A payment is due by December 31 every year until the Roth IRA is depleted.

    The minimum amount you must distribute is calculated by dividing the prior-year December 31 Roth IRA balance by your life expectancy, which is found in the IRS’s Single Life Expectancy Table.

    ► EXAMPLE

     

     Assume your Aunt Sally died on July 1, 2017, at age 68, and named you as beneficiary of her Roth IRA. Her Roth IRA balance as of December 31, 2017 is $100,000. You would use the life expectancy for your age in 2018 (the year after death) to calculate the first payment. If you were age 45 in 2018, the life expectancy would be 38.8. The payment would be $2,577.32 ($100,000/38.8). For the next year’s calculation, you would subtract one from the previous year’s life expectancy (38.8-1 = 37.8) and so on for each subsequent year’s calculation. 


    If you are a spouse beneficiary, you have two extra options:

      1. You could wait until your spouse would have turned 70½ before you start taking annual payments.
      2. For each year’s payment, you can use your actual age to determine the life expectancy factor rather than reducing the first year’s factor by one. This method results in a slightly smaller required payment than a non-spouse beneficiary calculation.
  • Does the life expectancy payment calculation change if I am not the only beneficiary of the Roth IRA?

    If there are multiple beneficiaries named for the Roth IRA, each beneficiary may calculate life expectancy payments based on their own life expectancy if each beneficiary’s share is separately accounted for by the Roth IRA custodian. Separate accounting must be set up by December 31 of the year following the year the Roth IRA owner died. If this deadline is not met, the minimum annual payments may have to be calculated based on the oldest beneficiary’s life expectancy.

    Depending on the Roth IRA custodian’s policies, it may set up a separate account for each beneficiary on its operating system or may request that each beneficiary sign IRA documents to establish an inherited Roth IRA.

    Each beneficiary must withdraw his or her share of the required amount each year.

  • Am I responsible for calculating the payment amount each year?

     You are responsible for ensuring that you take at least the minimum required amount from your inherited Roth IRA each year. If you choose to take life expectancy payments, you will need to calculate your minimum amount. The Single Life Expectancy Table and instructions for calculating payments can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):

    https://www.irs.gov/publications/p590b#en_US_2017_publink1000230812

  • If I am a surviving spouse, how do I treat the Roth IRA as my own?

    The Roth IRA custodian may allow you to take over the existing Roth IRA. Some Roth IRA custodians will require you to sign documents to establish a Roth IRA in your name. You may also transfer the assets to your own Roth IRA if you already have one.

    If you choose to treat your spouse’s Roth IRA as your own Roth IRA, you can make contributions and take distributions at will. In this case, your age and your Roth IRA five-year clock will determine whether a distribution qualifies as a tax-free “qualified distribution.”

    To be qualified, the distribution must occur after you have had a Roth IRA for at least five years, and you have attained age 59½, died or become disabled. If these conditions are not satisfied, any earnings included in a distribution will be taxable income in the year of the distribution. Earnings that are taxable may be subject to a 10% early distribution penalty if you are not yet age 59½.

  • How are beneficiary payments taxed?

    As long as the Roth IRA owner had a Roth IRA (does not have to be the Roth IRA that you inherited) for at least five years before he or she died, all of your Roth IRA beneficiary payments will be tax-free.

    If the Roth IRA owner did not have a Roth IRA for at least five years before death, you will pay tax on the earnings portion of your Roth IRA beneficiary payments until the five-year requirement has been met.  The portion of the distribution that consists of contributions and rollover assets will always be tax-free. The ordering rules for Roth IRAs deem contributions to be the first money distributed from a Roth IRA. So, you can still withdraw tax-free money if you only withdraw the amount of contributions (and rollovers and conversions) that have been made and do not touch the investment earnings. Once the Roth IRA has been in existence for five years, all of your payments from the Roth IRA will be tax-free.

    If you are a spouse beneficiary who treats the inherited Roth IRA assets as your own, you must meet the requirements for a qualified distribution (owned a Roth IRA for at least five years and are age 59½ or disabled) for the earnings to be withdrawn tax-free.

Traditional IRA Beneficiary

  • I inherited a traditional IRA. What should I do first?
      1. Understand your options – When you inherit an IRA following the IRA owner’s death, federal tax laws require that you distribute the account balance within a certain time frame. The laws provide a few payment options. The financial institution where the IRA is located (IRA custodian) may have more restrictive policies than what is permitted under federal law, so you will want to contact the IRA custodian to confirm your options. Depending on the dollar amount and types of investments in the IRA, you may also want to seek the advice of a financial advisor or tax professional before you make any decisions.

     

      2. Provide a death certificate – Before you can withdraw money from the IRA, you or the personal representative of the IRA owner’s estate will need to provide a certified death certificate to the IRA custodian.

     

      3. Meet the deadline – Under the tax laws, you have until December 31 of the year following the year the IRA owner died to take your first payment or provide instructions regarding how you want to take payments from the IRA. The IRA custodian may impose other deadlines.
  • What payment options do I have?

    You can always take payments more rapidly, but the tax laws are designed to ensure that the longest schedule for payouts of retirement savings is over either the owner’s life expectancy or the beneficiary’s life expectancy. Spreading payments over multiple years can reduce the tax impact of these distributions and allow the assets to grow tax-deferred for as long as possible. If you decide to leave the money in the inherited IRA long-term, you must take out a minimum amount each year. How long you have to deplete the account depends on three variables: whether you are a spouse or non-spouse beneficiary, your age, and the age the IRA owner.  

     

    TRADITIONAL IRA DISTRIBUTION OPTIONS

     

    For spouse beneficiaries

     

    For non-spouse beneficiaries

    5-year rule (in certain cases)

     

    5-year rule

    Life expectancy payments

     

    Life expectancy payments

    Treat IRA as own

     

     

  • What is the 5-year rule?

    Taking payments under the five-year rule is available to both spouse and non-spouse beneficiaries if the IRA owner died before April 1 of the year after the year he or she turned age 70½. This April 1 date is known as the required beginning date (RBD). Under this payment option, you can withdraw any amount you choose each year, or none, as long as you deplete the IRA by the end of the year containing the fifth anniversary of the IRA owner’s death.

     The five-year payment option is not available if the traditional IRA owner lived past his or her required beginning date. 

    ► EXAMPLE

     

    Assume your Aunt Sally died on July 1, 2017, at the age of 68, and named you as beneficiary of her IRA. If you elect the five-year rule payment option, you may take distributions at any point during the five years following Sally’s death as long as you deplete the IRA by December 31, 2022 – the year containing the fifth anniversary of Sally’s death.  
  • What are life expectancy payments?

    Life expectancy payments are available to both spouse and non-spouse beneficiaries regardless of the IRA owner’s age at death. Under the life expectancy payment option, you must withdraw a minimum amount each year. (You can always withdraw more if you want.) These payments must begin by December 31 of the year following the year the IRA owner died. A payment is due by December 31 every year until the IRA is depleted.

    The minimum amount you must distribute is calculated by dividing the prior-year December 31 IRA balance by a life expectancy factor specified in the IRS’s Single Life Expectancy Table. The person whose life expectancy is used to calculate the payments depends on the IRA owner’s age at death, your age, and whether you were a spouse of the IRA owner.

     

    Life Expectancy Used If …

    Death Before RBD

    Death After RBD

    Spouse beneficiary

    Your life expectancy, recalculated each year

    Whoever is younger – you or the IRA owner

    Non-spouse beneficiary

    Your life expectancy, nonrecalcuated

    Whoever is younger – you or the IRA owner

     

    ► EXAMPLE

     

     Assume your Aunt Sally died on July 1, 2017, at age 68, and named you as beneficiary of her IRA. Her IRA balance as of December 31, 2017 is $100,000. You would use the life expectancy for your age in 2018 (the year after death) to calculate the first payment. If you’re age 45 in 2018, the life expectancy factor would be 38.8. The payment would be $2,577.32 ($100,000/38.8). For the next year’s calculation, you would subtract one from the previous year’s life expectancy (38.8-1 = 37.8) and so on for each subsequent year’s calculation (i.e., nonrecalculated).

     

    If you are a spouse beneficiary, you have two extra options:

        1. You could wait until he or she would have turned 70½ before you start taking annual payments.
        2. For each year’s payment, you use your actual age to determine the life expectancy factor, rather than reducing the first year’s factor by one. This method results in a slightly smaller required payment than a non-spouse beneficiary calculation.
  • Does the life expectancy payment calculation change if I am not the only beneficiary of the IRA?

    If there are multiple beneficiaries named for the IRA, each beneficiary may calculate life expectancy payments based on their own life expectancy if each beneficiary’s share is separately accounted for by the IRA custodian. The separate accounting must be set up by December 31 of the year following the year the IRA owner died. If this deadline is not met, the minimum annual payments may have to be calculated based on the oldest beneficiary’s life expectancy.

    Depending on the IRA custodian’s policies, it may set up a separate account for each beneficiary on its operating system or request that each beneficiary sign IRA documents to establish an inherited IRA.

    Each beneficiary must withdraw their share of the required amount each year.

  • Am I responsible for calculating the payment amount each year?

    You are responsible for ensuring that you take at least the minimum required amount from your inherited IRA each year. If you choose to take life expectancy payments, you will need to calculate your minimum amount. The Single Life Expectancy Table and instructions for calculating payments can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):

    https://www.irs.gov/publications/p590b#en_US_2017_publink1000230812

  • If I am a surviving spouse, how do I treat the IRA as my own?

    The IRA custodian may allow you to take over the existing IRA. Some IRA custodians will require you to sign documents to establish a traditional IRA in your name. You may also transfer the assets to your own IRA if you already have one.

    If you choose to treat your spouse’s IRA as your own IRA, you can make contributions and take distributions at any time and will not be required to take distributions until you are 70½.

    One thing to consider if you treat inherited IRA assets as your own is that you will pay a 10% early distribution tax, in addition to income tax, on amounts you withdraw from your IRA before reaching age 59½. This 10% tax does not apply to distributions from an inherited IRA. So, if you maintain an inherited IRA until you reach age 59½ and then treat the IRA as your own, the inherited assets will never be subject to the 10% early distribution tax.

  • How are beneficiary payments taxed?

    You generally must include any payments you take from an inherited traditional IRA in your taxable income for the year. If the IRA owner made any nondeductible contributions to the IRA, however, a portion of each payment may be tax-free. A worksheet to calculate the amount that can be excluded from tax can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):

    https://www.irs.gov/publications/p590b#en_US_2017_publink1000230812