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Author: bluff Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75656  
Subject: Conduit IRA distributions Date: 2/21/2000 8:40 AM
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Each of my two sons will inherit a conduit IRA from their grandmother. The IRA is now worth about $45,000 and consists primarily of a government bond fund (about $40,000) and one stock (Texaco).

As I understand how this works, each will be required to take a minimum annual distribution over a five year period.

Given the 5 year timeframe for this account, I'd appreciate any advice whether it's worth reinvesting in some sort of MI screen, leave as is, or whatever. Would it be better to withdraw the entire account in one lump sum and open a regular investment account for them?

bluff
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19357 of 75656
Subject: Re: Conduit IRA distributions Date: 2/21/2000 9:16 AM
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Greetings, Bluff, and welcome. You wrote:

<<Each of my two sons will inherit a conduit IRA from their grandmother. The IRA is now worth about $45,000 and consists primarily of a government bond fund (about $40,000) and one stock (Texaco).

As I understand how this works, each will be required to take a minimum annual distribution over a five year period.

Given the 5 year timeframe for this account, I'd appreciate any advice whether it's worth reinvesting in some sort of MI screen, leave as is, or whatever. Would it be better to withdraw the entire account in one lump sum and open a regular investment account for them?>>


I'll leave the investments to you. Just understand that as the money comes out of the IRA, your sons will be taxed at ordinary income tax rates on the amount they receive. Therefore, if you elect to take that money in one year, then in that year they will be taxed on that sum. If that has no impact on their marginal income tax bracket in that year, then there's nothing to really preclude you from taking that approach.

Regards..Pixy


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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19359 of 75656
Subject: Re: Conduit IRA distributions Date: 2/21/2000 10:41 AM
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Each of my two sons will inherit a conduit IRA from their grandmother. The IRA is now worth about $45,000 and
consists primarily of a government bond fund (about $40,000) and one stock (Texaco).

As I understand how this works, each will be required to take a minimum annual distribution over a five year period.

Given the 5 year timeframe for this account, I'd appreciate any advice whether it's worth reinvesting in some sort of MI
screen, leave as is, or whatever. Would it be better to withdraw the entire account in one lump sum and open a regular
investment account for them?


I do not know the amount of taxable income they have but if it is minimal, then take out as much money for the IRA as you can without getting out of the 15% tax bracket or if they have income then the 28% breaket.

The benefit to getting out early is that the earnings on the money will not be taxed. The negative is that you will have less money to invest because you paid tax on it.

If the money will be invested for the longterm I would invest the IRA for the longterm. When you sell the investment in the IRA rebuy in a regular account. I would not think in terms of a three to five year investment in the IRA and get into fixed income.

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Author: SuzanneSLO One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19365 of 75656
Subject: Re: Conduit IRA distributions Date: 2/21/2000 2:57 PM
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Bluff: In your post you stated:

"As I understand how this works, each will be required to take a minimum annual distribution over a five year period."

Your understanding of the distribution term may not be correct, but my personal experience suggests that many IRA trustees may believe this to be your sons' best (or only)option. Under certain circumstances, your sons may actaully be able to take the IRA distribtuions over 20 or more years!

Because my husband just inherited an IRA from his father and we are currently in a high tax bracket, I have become more of an expert on this area than I really wanted. The answer for your situation depends on a number of factors including the grandmother's age, so bear with me will I list out the alternatires.

The maximum period for Minimum Required Distributions in an IRA inherited from anyone other than a spouse depends first on whether the original participant (your sons' grandmother) had reached her required beginning date for mandatory distributions before her death, which is April 1 of the year following the calendar year in which she turned 70 1/2.

If not, and your sons' are named as beneficiaries under her IRA, they can take the money over the life expectancy of the oldest brother. Only if they are not named as beneficiaries in the IRA (and are, for example, taking it as beneficiaries of her estate) must they take it over no more than 5 years.

If she had reached her required beginning date before death, then the payout period depends next on whether your sons were named as beneficiaries in her IRA. If not, then they must take the entire amount by the end of the calendar year following her death.

If they were named beneficiaries under her IRA, then the payout depends on whether her life expectancy was being re-calculated annually.

If her life expectancy was being re-calculated, then your sons can take the money over the life expectancy of the oldest brother.

If her life expectancy was not being re-calculated, your sons can take the money out over the remaining joint life expectancy of their grandmother and the oldest brother. This joint life expectancy is computed without regard to the so-called 10-year rule (techinically, the Minimum Incidental Distribution Benefit, which presumes that the oldest beneficiary is not more than 10 years younger than the participant) and will undoubtedly mean that the payments will come to your sons more slowly than they were coming to their grandmother.

Remeber, that these are MINIMUM distributions required by law to avoid paying a penalty to the IRS. The beneficiary can always take more out of the IRA than the minimum required. While any distribution is taxable, in the meantime the investment will continue to grow tax free.

If you think that your sons' are entitled to a longer term for the required minimum distribution than 5 years, stick up for their rights even in the face of disagreement from the IRA trustee! Check out IRS Publication 590 that spells out the required minimum distrbutions from inherited IRAs in more detail. I noticed at least 1 book at B&N on distributions from IRAs that might prove helpful.

Sorry this was so lengthy but I hope it provided useful information. -- Suzanne

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Author: bluff Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19376 of 75656
Subject: Re: Conduit IRA distributions Date: 2/21/2000 6:56 PM
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Thanks for taking the time to explain all this. It sure is complicated. Now at least I know what questions I need to ask about the distribution formula.

bluff

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