CEA Retirement Planning & IRA Estate Strategies 2 — Questions and Answers
Question 1: When a surviving spouse inherits a traditional IRA, which unique option is available that is NOT available to other beneficiaries?
- They may delay RMDs indefinitely regardless of age
- They may roll the inherited IRA into their own IRA and treat it as their own (Correct answer)
- They may convert the inherited IRA to a Roth without any income tax
- They may exclude all inherited IRA distributions from taxable income
Correct answer: They may roll the inherited IRA into their own IRA and treat it as their own
Surviving spouses have the exclusive right to roll an inherited IRA into their own IRA, allowing them to treat it as their own and delay RMDs until they reach the applicable RMD age.
Question 2: What is the primary estate planning advantage of converting a traditional IRA to a Roth IRA?
- It immediately removes the account balance from the taxable estate
- It allows beneficiaries to receive income-tax-free distributions (Correct answer)
- It eliminates all estate taxes on the converted amount
- It avoids the 10-year distribution rule for inherited Roth IRAs
Correct answer: It allows beneficiaries to receive income-tax-free distributions
Roth conversions allow heirs to inherit an account that produces income-tax-free distributions, maximizing the after-tax value passed to beneficiaries even though income taxes are paid at the time of conversion.
Question 3: What is an 'accumulation trust' in the context of naming a trust as an IRA beneficiary?
- A trust that must distribute all RMDs immediately to named beneficiaries
- A trust that can retain IRA distributions within the trust rather than passing them directly to beneficiaries (Correct answer)
- A trust that converts traditional IRA funds to Roth IRA funds tax-free
- A trust that permanently eliminates all income taxes on IRA distributions
Correct answer: A trust that can retain IRA distributions within the trust rather than passing them directly to beneficiaries
An accumulation trust retains IRA distributions within the trust rather than requiring immediate pass-through to beneficiaries, providing asset protection and control over fund usage, though retained income is taxed at compressed trust income tax rates.
Question 4: What is Net Unrealized Appreciation (NUA) and when is it relevant in retirement planning?
- The tax-free growth in a Roth IRA that is not subject to RMDs
- The appreciation on employer stock distributed in-kind from a qualified plan that is taxed at capital gains rates (Correct answer)
- The after-tax growth in a traditional IRA that avoids double taxation
- The unrealized gain on estate assets that receives a step-up in basis at death
Correct answer: The appreciation on employer stock distributed in-kind from a qualified plan that is taxed at capital gains rates
NUA is the difference between the cost basis and fair market value of employer stock distributed in-kind from a qualified retirement plan; this appreciation is taxed at lower long-term capital gains rates rather than ordinary income rates.
Question 5: Unlike assets that receive a step-up in basis at death, how are inherited traditional IRA distributions generally taxed to the beneficiary?
- At the long-term capital gains rate applicable to the decedent
- As ordinary income to the beneficiary in the year of distribution (Correct answer)
- At a flat 20% federal estate and income combined tax rate
- Tax-free because the estate already paid estate taxes on the account value
Correct answer: As ordinary income to the beneficiary in the year of distribution
Inherited traditional IRA distributions are taxed as ordinary income to the beneficiary because the original contributions were made on a pre-tax basis; no step-up in basis applies to retirement accounts.
Question 6: What are the requirements for a trust to qualify as a 'see-through trust' (or look-through trust) for IRA beneficiary purposes?
- The trust must be revocable and the grantor must be the sole beneficiary
- The trust must be valid under state law, irrevocable at death, have identifiable beneficiaries, and provide IRA documentation to the plan administrator (Correct answer)
- The trust must be a charitable remainder trust approved by the IRS
- The trust must be established at least five years before the IRA owner's death
Correct answer: The trust must be valid under state law, irrevocable at death, have identifiable beneficiaries, and provide IRA documentation to the plan administrator
A see-through trust must be valid under state law, become irrevocable at the owner's death, have identifiable individual beneficiaries, and provide required trust documentation to the plan administrator by October 31 of the year following death.
Question 7: Which retirement account type allows continued contributions and delayed RMDs past the standard RMD age if the participant is still actively employed by the plan sponsor?
- Traditional IRA
- Roth IRA
- 401(k) through the current employer (Correct answer)
- Inherited IRA
Correct answer: 401(k) through the current employer
Employees still working can continue contributing to their current employer's 401(k) plan after reaching the RMD age and, under SECURE Act 2.0, can delay RMDs from that plan until actual retirement.
CEA Retirement Planning & IRA Estate Strategies 2
When a surviving spouse inherits a traditional IRA, which unique option is available that is NOT available to other beneficiaries?