Lynn Brenner's Family Finance

What Is a Trustee-to-Trustee Transfer of an Inherited IRA?

Q: I have just read your advice on moving an inherited IRA by doing a 'trustee to trustee' transfer. I have no immediate need for this money, and I think I would like to do this. I've inherited two different accounts that will total about $20,000. I am 50 years old. My main question is 'what exactly is trustee to trustee'? Does this mean 'bank to bank'?  If I do this, will the money be in my name so I can take it out at a later date? --CF via email

 

A: First things first. Unless you inherited this IRA from your spouse, you can't put the money in your name. The original owner's name must stay on the IRA, with you listed only as its beneficiary.

That doesn't mean you won't be able to take withdrawals. In fact, if you aren't a surviving spouse, you must start taking withdrawals from this IRA by December 31 of the year after the original owner died, even if you don't need the money.

The bad news is that each withdrawal is taxable income. 

The good news is that you're not required to withdraw more than an annual minimum based on your life expectancy as it appears on the Internal Revenue Service actuarial table for beneficiaries. If you're 50 years old, your life expectancy is 34.2 years.

Your annual withdrawal must be based on the total IRA balance. If that total is $20,000, divide $20,000 by your 34.2 life expectancy ... and your first annual withdrawal is $584.79.

Okay -- what about moving the account?

'Trustee to trustee' means that the IRA's current custodian transfers the account to a new custodian. The transfer is done between the two companies and the money never touches your hands, even in the form of a check.

This is the only way a non-spouse IRA beneficiary can move the account without triggering a tax on it. If the bank gives you a check to deposit in another institution, the whole IRA automatically becomes taxable.

The IRA custodians don't have to be banks. You can move the IRA from a bank to another bank, or you can move it from a bank to any mutual fund company, stock brokerage, or insurance company.

But wherever you move this money, it must go into an IRA in its original owner's name.  Only a surviving spouse gets to put an inherited IRA into his or her own name. If any other beneficiary does that, the account stops being an IRA and becomes ... that's right, immediately taxable.

Here's how you do a trustee to trustee transfer:

The IRA is currently in two accounts, one at Bank A and one at Bank B. Let's say you decide you want to move both accounts into a single IRA at Mutual Fund Company X.

First, you must open a brand-new IRA at Mutual Fund Company X.

Be sure to ask for the paperwork to open an inherited IRA, and make it clear that you are not the surviving spouse. (Many IRA custodians automatically hand out the forms to open an IRA in your own name. That's not what you want!) Fill in the name of the new IRA: For example, if you inherited Jane Smith's IRA and your name is Catherine Freeman, the account will be 'Jane Smith IRA (deceased December 14, 2009) for the benefit of Catherine Freeman'.

There's a space on the IRA form to say how you're going to fund this new account. That's where you say it is to be funded with 100% of the proceeds of the accounts at Bank A and Bank B. You'll fill in those account numbers.

Mutual Fund Company X is then responsible for getting Bank A and Bank B to transfer the money into your new IRA. If there are any delays -- if Bank A wants you to confirm independently that you've authorized the transfer, for example -- Mutual Fund Company X will tell you what you need to do to speed the transfer along. It will also tell you when the transfer is completed.

You can invest the IRA in any of the choices offered by Mutual Fund Company X. (And if Mutual Fund Company X has a discount brokerage affiliate -- as Vanguard Group and Fidelity Investments do, for example -- you can invest it in virtually any mutual fund offered by any other company.)

You must recalculate your required annual withdrawal every year. You'll find the actuarial table -- 'Single Life Expectancy Table for Use by Beneficiaries' -- at the back of IRS publication 590. You can download it here.

Of course, you can take out more than the minimum if you want. Only the withdrawals are taxable; the balance grows tax-deferred.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

Social Security Disability: Does My Benefit Increase If I Get Sicker?

Q: I'm 55 years old and I receive Social Security Disability for fibromyalgia.  If my condition worsens, can I get additional compensation? --DO via email

 

A: Unfortunately, no.

The size of your Social Security Disability benefit isn't based on the severity of your medical condition. It's based on your average earnings over a period of time that is set by law: the number of years that you could be expected to have worked under Social Security.

Here's a basic description of how it works. Brace yourself -- it's mind-bendingly complicated!

First, you must have met certain work requirements to qualify for Social Security disability benefits.  Regardless of the age at which you become disabled, you must have as many Social Security credits as the number of calendar years after the year you turned 21 and before the year when you became disabled.

No, I can't figure that out, either!

But the Social Security Administration tells me it means that a person who was disabled at age 34 must have at least 12 credits.  (Let's see...How many calendar years have passed since the year in which the 34 year-old turned 21? Okay, twelve!) 

Second, if you became disabled at age 31 or later, you must have earned 20 Social Security credits (5 years of work under Social Security) during the 10-year period ending with the calendar quarter in which he became disabled. 

"For example, a 34-year-old person disabled in December 1999 must have worked at least 5 years between December 1989 and 1999," says Jane Zanca, an agency spokewoman in New York.

Luckily, you don't have to figure out this out for yourself. The Social Security Statement you get in the mail each year tells you how much you'd currently receive if you became disabled.

This is an important and much-needed benefit. But as all of the above makes clear, the amount you get really has nothing to do with your personal circumstances.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

Divorce and Social Security: I Have Two Ex-Husbands - Can I Claim Social Security On Either of Their Work Records?

Q: I will be 66 next year and would like to wait until I am 70 to start collecting my benefits. I have been married twice, but I've been divorced and single for more than three years.  Am I still able to collect spousal benefits, even though I remarried after my first divorce?  If so, which spouse’s benefits am I entitled to apply for? What documents do I need? --AL, via email


A: If both of your marriages lasted at least ten years, you're entitled to a benefit based on the work record of either of your ex-husbands -- so you can pick the one that gives you the largest amount.

(And in case you're wondering, your claim won't reduce the Social Security benefits available to your former husband or his current wife, if he has one.)

Here are the rules:

You can receive benefits on an ex husband or ex wife's Social Security record if you:

        * were married to the former spouse for at least 10 years;
        * are at least age 62 years old;
        * are unmarried;
        * your ex is eligible to receive his or her own retirement or disability benefit.

Even if your ex spouse hasn't yet applied for his/her own benefit, you can still receive a benefit based on his or her record if all the requirements above are met, and you've been divorced from him or her for at least two years.

One important caveat: Even if you meet all these requirements, you won't qualify for a spousal benefit if you're under your full retirement age and are eligible for a higher Social Security benefit based on your own work record.

That's because when you apply for Social Security before reaching your full retirement age, your application is automatically deemed to be for both your spousal benefit and your own benefit -- and you get the larger of the two amounts.

In your case, that's not a problem. At 66, you've reached your full retirement age. As a result, you're allowed to exclude your own work record from your application for your spousal benefit. (For more on this important, but often misunderstood rule, see my articles for AARP Bulletin and  AARP magazine, as well as other posts on this blog.)

You can collect your spousal benefit while you work -- and since you're 66, you won't forfeit any of that benefit regardless of the amount you earn.  You can then switch to your own larger benefit when you're 70.

In general, here's what you need to provide when you apply for benefits:

    * Your Social Security number;
    * The Social Security number of the person on whose record you're applying;
    * Your birth certificate;
    * Proof of U.S. citizenship or lawful alien status (i.e., a birth certificate showing a U.S. place of birth, a naturalization certificate or an Immigration and Naturalization Service document showing alien status);
    * Your W-2 forms or self-employment tax return for last year if you're applying for Retirement or Disability benefits;
    * Your military discharge papers if you had military service;
    * Your marriage certificate if you're a widow or widower;
    * Your divorce papers if you're applying as a divorced spouse or surviving divorced spouse;
    * The name of your bank and your account number so your benefits can be directly deposited into your account.

Go to the National Center for Health Statistics for information about where you can obtain vital records (i.e., birth and death and marriage certificates, divorce records). But there's no reason to delay your application. The Social Security Administration will help you retrieve the documents you need.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

Can I Claim My Late Husband's 401(k) Account, Even Though He Left It To His Parents?

Q: My husband recently died and he left his Mom and Dad as the beneficiaries for his 401(k).  Do I have any legal grounds to contest this, and will I need an attorney to do so? -- LH via email

A: You certainly do have grounds to contest this -- and it shouldn't take a lawyer. You're legally entitled to this money. There's no gray area here.

Call the 401(k) plan's administrator immediately and tell them you are the plan participant's surviving spouse. By federal law, you are entitled to be your husband's 401(k) beneficiary, says Lisa Arko, an employee benefits consultant at Towers Watson in New York City. Your spouse can't name someone else unless you have consented in writing to waive that right.

(And in case you're wondering, that waiver can't be part of a prenuptial agreement. A prenuptial agreement can only address rights you actually have -- and you have no legal right to be your mate's 401(k) beneficiary until after your marriage.)

It's entirely possible that your husband had named his parents as his beneficiaries before you were married, and simply failed to update his 401(k) paperwork after the wedding. That seems likelier than that he would designate them as beneficiaries after your marriage without first obtaining your written consent.

But it makes no difference how this happened. You are legally entitled to this money. The 401(k) plan administrator will be very aware of this, and should respond immediately. The last thing they'll want to do is pay the wrong beneficiary!

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.