Case Analyzer – Inherited IRA

[Kathleen Reynolds]

#4082

This analysis allows you to compare the results of two options:

• Option 1: Where the beneficiary takes a lump sum distribution (distribute the entire balance, usually immediately after the owner’s death, instead of stretching payments).
• Option 2: Where the assets are maintained in a stretch IRA and distributed over the life expectancies of the beneficiaries (or life expectancy of the beneficiary).

Step 1: Select the Analysis

Check the “Stretch IRA Naming Beneficiary” option.

Step 2: General Inputs

This screen allows you to provide certain personal information about the client and his spouse, the projected growth rate of the accounts (this looks at both Roth and non-Roth so both can be fairly compared), and the “retirement plan balance” (the amount of funds that the client has available in his non-Roth retirement account). It also allows you to provide information about the required minimum distribution amounts that the client may need to take when he reaches age 72.

• Names: Enter the name of the owner.
• Birth Dates: Enter the birth date of the owner.
• Growth used for All Accounts: Enter the growth rate to be used for all accounts.

Note: If you have entered different rates or custom rates for the growth of the accounts, those rates will be replaced by the rate entered here when you press the Case Analyzer’s Calculate button.

• Retirement Plan Balance: Enter the Balance of the Retirement Plan.
• Spend Minimum Distributions Instead of Reinvesting Them? In order to make a reasonable assessment on the differences between (a) not converting and (b) converting, we need to consider what happens to required minimum distributions (RMD) amounts that are taken from the non-Roth account if no conversion is done. Check this box if your client will need the RMD amounts to cover living expenses. If the client will take the RMD amounts and keep it in a savings account, do not check this box.
• Apply Waiver of 2009 RMDs? H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) was signed into law on December 23, 2008, and provided that RMDs for IRAs and defined contribution plans were waived for 2009. As such, it is optional for individuals to take distributions from these retirement accounts. IRS issued Notice 2009-82, explaining that 2009 RMD amounts that were taken from these accounts can be rolled over. Check this box if the client did not take an RMD for 2009. Do not check the box if:
  • The RMD was taken and not rolled over, or
  • The rollover to the Roth is being made from a Defined Benefit plan, as RMDs were not waived for these plans.
• Owner Death Year: Enter the year of death for the owner of the Retirement Plan.

Step 3: Beneficiaries

This step allows you to input information about any non-spouse beneficiaries of the client and is important in determining the net distribution amount if distributions are stretched over the life expectancies of these beneficiaries.

• Check the “Include Non-spousal Beneficiaries” if the client has individuals who are named as beneficiaries of the account and are not the spouse of the client.
• Check the “Use Multiple Beneficiaries after the Death of the Owner” if there are more than one non-spouse beneficiaries.
• Check the “Apply Separate Accounts Rule” if there are multiple beneficiaries.
• Input the names of the beneficiaries, the years in which they were born, and the percentage amount they are designated to receive. Ensure that the total amount adds up to 100%.

Step 4: Taxes

In this section, you provide information on the client’s adjusted gross income (AGI), the projected rate of inflation, and income tax. When calculating the client’s income tax, you have two options:

1. choosing to calculate the taxes using the client’s AGI, and
2. using specific tax rates which also allow you to change the client’s amount of tax exemptions and tax filing status and choose between the marginal rate vs. average tax rate.

Calculate taxes from an AGI

• If you choose this option, the software calculates the income tax based on the client’s AGI that you input, using tax rates provided by the IRS.
• From Year: ____ To Year: ____: Input the year in which the AGI begins, which is usually the current year, and the year that the AGI ends. If you are unsure of the final year in which the client will receive the income, you can have the software calculate the period by selecting “Calculate” and choosing an option from the drop-down menu. For this example, we assume that the AGI lasts from 2022 to 2081.
• Annual Growth of AGI: Input the growth rate for AGI. Check the “Use Inflation Rate for Tax Brackets:” box to use the inflation rate to adjust future AGI tax brackets.

Use Rates to calculate Taxes

• Using this option allows you to manually input the client’s income tax rates and change the number of exemptions.
• Clicking on the “Calculate” button allows you to choose the clients Filing Status, Number of Exemptions, and choose between the Average Tax Rate and Marginal Tax Rate. This is done for both the Normal Tax Rate and the tax rate During Conversion.

Inflation Rate: Input the projected inflation rate.

Step 5: Results

This is the final step in the Inherited IRA Analysis. This provides a description of the scenarios that are included in the analysis.

If You Need to Make Changes: You can also go back to each step to review your data input by clicking on the ‘previous’ button or by selecting the applicable tab at the top of your screen.

Your Analysis Reports:

You have two reports from which to choose, the Short or Full report.

The Short report includes the following:

• Net Distributions Comparison
• Retirement Plan Analysis
• Retirement Plan Distributions to Heirs

The Full report includes all the Short reports, but also includes the following:

• Inputs Report
• Net Distributions Comparison
• Distributions Breakdown

Both options will always be available. As such, if the Short report is selected, the Full report can be chosen later, and vice versa. The choice you make here will likely be determined by whether you want a quick snapshot of the analysis or if you want all the information that is included in the fill report.

To View Your Reports: Click the “Calculate” button to see your reports.

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