Financial Focus Kim DeVoss

For individuals who are unable to legally marry or who simply choose not to, there are unique considerations around beneficiary planning for your retirement assets. Under the current rules, the IRS does not recognize domestic partners as spouses for purposes of retirement account planning. Rather, partners are considered to have the options available to non-spouse beneficiaries.

At Wells Fargo there are financial advisors who have the Accredited Domestic Partnership Advisor (ADPA) designation and can assist with interpreting the legal guidelines for domestic partners, understanding the options available for inheritance, and exploring the possibility of stretching out the life of inherited IRA assets.

It’s also important that you explore all the choices for handling your inheritance of qualified assets with your tax and legal advisors before executing a strategy.

Here are some basic facts you need to know before having these discussions:

• Account designations. If you’re a domestic partner who has been named as a beneficiary, you do not have the ability to rollover an IRA you’ve inherited to your own IRA. If you decide to keep the IRA you inherit, the IRA custodian must keep the IRA titled as an “Inherited” or “Beneficiary” IRA.

The wording on the account may vary, but the important thing is that the account clearly shows that it is for the benefit of the beneficiary, but is NOT the beneficiary’s IRA. The name of the deceased owner should appear with an indication that the beneficiary controls the account. If there are multiple beneficiaries and the shares are fractional, you may be best served by establishing separate Inherited IRAs, so that each beneficiary can select his/her own investments and use his/her own age to compute required minimum distributions (RMDs).

• Tax consequences. Dividing the deceased’s account into separate Inherited IRAs is considered a plan-to-plan transfer and is not a taxable event. Beneficiaries avoid the 10 percent premature distribution penalty in Inherited IRAs regardless of the beneficiary’s age. The 10 percent penalty is waived, as this is a “death distribution.” The beneficiary only owes ordinary income tax on distributions.

• “Successor” beneficiary. Once you have established your Inherited IRA, you will want to designate your own “successor” beneficiary. The successor can step into your shoes and continue to take distributions over your single-life expectancy factor (term-certain) if you die before distributing all of the assets in the IRA.

After you inherit the IRA, your successor beneficiary should be named as soon as possible as part of a complete estate plan.

Legal considerations. A non-spouse beneficiary who inherits a qualified employer sponsored retirement plan (401(k), 403(b), governmental 457, etc.) must be permitted a direct trustee-to-trustee transfer of that plan balance to an Inherited Traditional or Inherited Roth IRA.

Your financial advisor can help you establish the Inherited IRA; once set up, the employer plan sponsor can assist in executing the transfer of assets into your Inherited IRA.

Non-spouse beneficiaries can elect to make a direct trustee-to-trustee transfer from the plan to the beneficiary’s Inherited Roth IRA. A Roth conversion of after-tax amounts will not be taxable income. Any pre-tax amount converted will be included in the Inherited Roth IRA holder’s gross income for the year.

Remember you still have to take RMDs each year from your Inherited Roth IRA. If you have an Inherited Traditional and Inherited Roth IRA, RMDs must be taken from both accounts to take advantage of the stretch IRA strategy.

Only a direct transfer is allowed. This is a non-taxable distribution from the qualified plan that is sent directly to the new custodian and will be reported to the IRS as a rollover. Failure to employ the direct transfer process could make this transaction fully taxable to the beneficiary and end the tax-deferral available under the Inherited IRA. he 60-day rollover rule does not apply to non-spouse beneficiaries, and once a distribution is taken from the IRA, it cannot be reversed.

Anyone can convert inherited qualified retirement plans (401(k), 403(b), 457 plans, etc.) to an Inherited Roth IRA without regard to their modified adjusted gross income (MAGI), or tax filing status. Taxes will be paid at whatever federal income tax rate is applicable for the conversion tax year.

• This article was written by Wells Fargo Advisors and provided courtesy of Ahwatukee Financial Advisor S. Kim DeVoss, CFP. Reach her at (480) 940-5519. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

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