Taxation & Legal Considerations in Retirement Flashcards

Under the SECURE Act (2019), most non-spouse beneficiaries who inherit an IRA must distribute the entire account within how many years?

Answer: 10 years

The SECURE Act requires most non-spouse beneficiaries (those not in an 'eligible designated beneficiary' category) to empty inherited IRAs within 10 years.

Which of the following individuals qualifies as an 'Eligible Designated Beneficiary' exempt from the 10-year IRA distribution rule?

Answer: A minor child of the deceased IRA owner

Minor children of the IRA owner are eligible designated beneficiaries who may stretch distributions over their life expectancy until they reach the age of majority.

How are qualified distributions from a Roth IRA taxed at retirement?

Answer: Completely tax-free if the account is at least 5 years old and the owner is at least 59½

Qualified Roth IRA distributions are entirely tax-free provided the 5-year holding rule is satisfied and the owner is at least 59½.

What is the Windfall Elimination Provision (WEP) designed to do?

Answer: Reduce Social Security benefits for workers who also receive a pension from non-covered employment

The WEP reduces the Social Security benefit for workers who receive a pension from jobs not covered by Social Security, such as some government positions.

A retiree has a $1,000,000 traditional IRA and dies at age 80 with a non-spouse adult beneficiary. How long does the beneficiary have to distribute the IRA under SECURE Act rules?

Answer: By December 31 of the 10th year following the original owner's death

Non-spouse adult beneficiaries must distribute all inherited IRA assets by December 31 of the 10th year following the account owner's death.

Which type of trust provides the trustee with broad discretion to distribute trust income and principal while offering asset protection from creditors?

Answer: Irrevocable discretionary trust

An irrevocable discretionary trust gives the trustee discretion over distributions and, because the grantor has relinquished control, typically shields assets from beneficiaries' creditors.

For a married couple, using the unlimited marital deduction allows assets to pass to the surviving spouse estate-tax-free. What is the primary risk of relying solely on this strategy?

Answer: Assets not used during the surviving spouse's lifetime may be subject to estate tax upon the survivor's death without proper planning

While the marital deduction defers estate taxes, failing to use the deceased spouse's unified credit through a bypass trust or portability election can result in a larger taxable estate at the survivor's death.