Lynn Brenner's Family Finance

At What Age Can I Move My IRA Penalty-Free From One Bank to Another?

Q: I have traditional and Roth IRAs of my own, and I have also inherited some traditional IRAs. I am currently taking annual distributions from the inherited IRAs based upon my own life expectancy. Here are my questions: 

When I reach age 59 1/2, I understand that I can "move around" all IRAs (traditional, Roth, and Inherited) without any penalty. Is that correct? Is there any special treatment for moving Inherited IRAs from one bank to another? Now that bank interest rates are slowly creeping up, after I turn 59 and a half I'd like to move some IRAs that are invested in CDs currently earning low interest rates. Are there any tax consequences if I do this? Will I have to file anything with the IRS when I move an IRA from one bank to another?

If I have four IRAs in four different banks, is there any rule against moving all of them in the same year?  Is there a limit on the number of times I can move each IRA in one calendar year?

Are there any penalties in "breaking" any of the IRA CDs before their maturity dates?

At what age can I take out some of my own IRA money without penalty? I know that any money I take from the traditional IRAs have to be reported on my tax returns. But am I right that I don't have to report my withdrawals from the Roth IRAs? --DM, via email

A: You don’t have to wait until you’re 59 and a half years old to move the IRAs you own from one provider to another without triggering any taxes or any tax penalty. An IRA owner can do that at any age.

It's not always possible for a beneficiary to move Inherited IRAs, however, as I’ll explain in a moment.

But even though there is no tax penalty, you may trigger a provider's early withdrawal penalty depending on how your IRA is invested.  A prime example is moving a CD before its maturity date. The only time banks waive this penalty -- and not all of them do -- is if you must ‘break’ a CD before maturity in order to take a required distribution from an IRA after you turn 70 and a half years old. 

You don’t have to file anything with the IRS when you transfer an IRA between providers. And there’s no limit to how many times you can move each IRA in a single calendar year – although moving four IRAs several times a year would require a high tolerance for filling out financial services providers’ paperwork.

The best way to move an IRA from one provider to another is in a trustee-to-trustee transfer: You want to move an IRA from Bank A to Bank B. You open a new IRA at Bank B, and then Bank B asks Bank A to transfer your IRA money into the new account.

Alternatively, you can take a check from Bank A and deposit it in a new IRA in Bank B. But in that case, to avoid taxes you must deposit the entire amount in a new IRA within 60 days. (This is called the 60-day rule.)

You can start withdrawing money from your own traditional IRAs without incurring a 10% early withdrawal tax penalty as soon as you turn 59 and a half. But the amount you withdraw is taxable income. (The IRA custodian reports IRA withdrawals to the IRS – so don’t omit it from your tax return in the hope that you can avoid paying taxes on it.)

Your Roth IRA withdrawals are all tax free after you turn 59 and a half and have owned the account for five years. You don't have to report them to the IRS.

Okay, so what about moving an Inherited IRA from one bank to another?

The IRS has no objection to your doing this, as long as you put the new Inherited IRA account in its original owner's name, listing yourself as the beneficiary. But occasionally, the bank’s rules don’t allow IRA beneficiaries to do a trustee-to-trustee transfer; this doesn't happen often, but it does happen. Unlike an IRA owner, an IRA beneficiary cannot use the 60-day rule to avoid taxes on a transfer. In other words, by refusing to allow trustee-to-trustee transfers, a bank with this rule makes it impossible for a beneficiary to move an Inherited IRA without triggering taxes.

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

(c) Lynn Brenner, All Rights Reserved

 

Does the Ex-Wife Get the 401(k) Account? Looks Like I Spoke Too Soon!

In my last post, I gave a grim answer to RM, a widow who had just learned that her recently deceased husband had forgotten to change the beneficiary designation on his 401(k) account, which still listed his former wife.

Would her husband's ex inherit the account as a result? she asked.

I wrote that that was indeed likely.

Well, hold the phone! It looks as if I was wrong!

I based that answer on a recent U.S. Supreme Court decision, 'Kennedy vs the Plan Administrator for the DuPont Savings and Investment plan'. In that case, the court unanimously decided that the DuPont plan must pay the decedent's 401(k) account to his former spouse even though she had waived her right to it in their divorce decree.

The reason: The decedent hadn't changed his beneficiary designation.

But I kept researching this question even after I posted that answer. (This is a perfect illustration of how blogging is often the equivalent of writing up your notes while you continue to report.)

I'd glad I did:

In every respect but one, the Kennedy case is the same as RM's -- but that one respect makes a critical difference, says Bob Walter, an attorney who specializes in 401(k) plans and is a principal at Buck Consultants.

In the Kennedy case, the alternative claimant to the 401(k) account was the decedent's estate. In RM's case, the claimant is the decedent's surviving spouse. That's an important distinction.

Let's put some names on RM's drama to make Walter's explanation easier to follow. We'll call our surviving spouse Rose, her late husband John, and his former wife Betty.

Federal law says your spouse is entitled to be your 401(k) beneficiary unless he or she waives that right and gives written consent to the designation of another beneficiary.

So as soon as John married his second wife Rose, she was entitled to be his beneficiary. Assuming Rose never waived that right or consented to the designation of another beneficiary, Walter says that  Betty the ex wife can no longer have a valid claim on his account.

He notes that the typical language in a large 401(k) plan's Summary Plan Description states: "If you and your spouse become legally divorced and you have specifically named your spouse as your designated beneficiary, that designation will remain in effect despite the divorce until you submit a new designation or you marry a new spouse." (Italics added.)

My initial post was right in one respect:  RM should definitely consult a lawyer. "Assuming that she can prove the fact of the marriage, she would appear to have a meritorious claim," says Walter.

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

(c) Lynn Brenner, All Rights Reserved

My Late Husband Didn't Update His 401(k) Beneficiary Form -- Will His Ex-Wife Inherit His Account?

Q: My husband passed away about 3 months ago. He had a 401(k) plan with his employer.  I just received paperwork in the mail about inheriting the account -- and although it was sent to our address, it had his ex-wife listed as the spousal beneficiary. I'm not quite sure what to do about this. 

My husband's divorce was very ugly. His ex-wife waived her rights to his 401(k) in the divorce decree, and he definitely would not want her to be his beneficiary. He told me shortly after we got married that he had changed the beneficiary to me.  I'm not sure if there was some kind of mishap with the paperwork or if this is an error on the company's part; but I haven't been able to find any copies of the change of beneficiary forms.

I've noted in your previous Q&A posts that the surviving spouse is entitled to be the husband's beneficiary unless she waives her rights.  But I've also found some cases where the ex-wife's claims were held up in court. I've been afraid even to call the plan provider for fear that they'll uphold her as beneficiary. Do you have any advice for me? What would the plan administrator's response be if I called to inform them that I am the surviving spouse? --RM, via email

 

 A: This is a very distressing situation. You have an uphill fight ahead of you, and you won't be able to wage it without legal help.

But there's no reason to delay in calling the 401(k) plan's administrator. You have to alert them to the situation; among other things, it's the only way to find out if they mistakenly sent you outdated paperwork. That's very unlikely, but it would quickly resolve things in your favor.

It's also possible that your late husband's plan has a provision automatically revoking a spousal beneficiary designation after a divorce. Some 401(k) plan documents have such a provision, says David Wray, president of the Profit Sharing/401(k) Council of America.**

Otherwise, your prospects are bleak. [I was wrong about this: See my next post.]

You're right that in cases very similar to yours, the ex-wife's claim has been upheld in court.

The big precedent is 'Kennedy vs the Plan Administrator for the DuPont Savings and Investment plan'. That case specifically focussed on how to decide who inherits a retirement plan account when the beneficiary form says one thing, and a divorce decree says another -- and it was unanimously decided in the ex-wife's favor by the U.S. Supreme Court just a year and a half ago.

In that case, William Kennedy had named his wife Liv Kennedy as his beneficiary in 1974. They divorced in 1994 --  and in the divorce decree, she waived her rights to any benefits under his retirement plans.

William Kennedy died in 2001, leaving $402,000 in his account in the DuPont plan. He had wanted that money to go to his daughter, Kari Kennedy, but he hadn't changed his beneficiary designation in the plan. Maybe he assumed the divorce decree made that unnecessary; or perhaps he intended to do it but never got around to it. (He did change his beneficiary designation in another plan.)

His daughter Kari, who was also his executrix, asked DuPont to distribute the account to his estate. She contended that there was no named beneficiary on the account, since Liv had waived her rights in the divorce decree. (When there's no designated beneficiary, a retirement account goes to the decedent's estate.) But DuPont said its only option was to follow the beneficiary designation form, which listed Liv Kennedy.

The Kennedy estate then sued DuPont and the plan administrator for the funds, arguing that Liv had waived the account in the divorce decree. The first court to hear the case agreed with that argument. But DuPont appealed to the Fifth Circuit Court, which rejected the earlier decision. Its reason: The waiver in the divorce decree was not a 'qualified domestic relations order' or QDRO. (A QDRO is a divorce court order specifically addressed to the administrator of the retirement plan. See my earlier post).

The case ultimately went to the U.S. Supreme Court, which on January 26, 2009 unanimously ruled that retirement plan documents must prevail: the person named on the beneficiary form gets the money.

The Court noted in its decision that in this case, the result wasn't a foregone conclusion: The DuPont plan had provided a way for William Kennedy to change his beneficiary designation, and also for Liv Kennedy to disclaim his account within nine months of his death. Neither of them had exercised these options. 

Your situation sounds almost the same, except that you are the surviving spouse. That fact may give you a stronger case to pursue against the ex-wife in state court.

Your late husband's plan administrator is going to follow the DuPont precedent, and pay his account to the named beneficiary. If that's your late husband's ex-wife, your only chance of getting this money is probably to sue her for it.

Once the account is paid to her, it's no longer governed by ERISA, the federal law that applies to employer-sponsored plans. This could help you. In Footnote 10 of the DuPont decision, the U.S. Supreme Court left open the possibility that after William Kennedy's account lost its ERISA-protected status, his daughter might have a legal case against his ex-wife to recover the money, based on the divorce decree the ex-wife had signed.

If you decide to pursue this, you will need the assistance of an attorney who specializes in estate law and has litigation experience. (See my earlier post about how to find one.) In your place, I would call the plan administrator and fully inform him of your situation; and at the very least, I would consult an estate lawyer for an expert opinion about your chances if you sue the ex-wife.

**This paragraph wasn't in my original post.

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

(c) Lynn Brenner, All Rights Reserved

Can a 401(k) Beneficiary Disclaim the Account She Inherited?

Q: I have been searching for an answer to a unique question. X died leaving a sizeable 401(k). He and his former spouse had signed an earlier separation agreement forfeiting any right in the other's 401(k) accounts. However, X didn't change the beneficiary designation with his 401(k) trustee.

The spouse of X is willing to give up the money in X's 401(k) but the company says that they have to pay it to the spouse. Would a renunciation work in this case? --KB via email

 

A: X's wife can probably disclaim (or renounce) this inheritance if he died less than nine months ago -- although her ability to do so may depend on the rules of the 401(k) plan**; but a disclaimer won't solve the problem unless X remembered to name his chosen heir as a contingent beneficiary on the 401(k) account, or at least to name that person in his will.

The real problem here is that X didn't file the necessary paperwork with his 401(k) plan administrator. This seemingly innocuous omission can lead to disaster for your survivors. (See my earlier post 'An Estate Planning Nightmare: Death, Taxes, and a Missing 401(k) Waiver').

A named beneficiary (or an heir named in a will) always has the option to disclaim an inheritance within 9 months of the decedent's death.

When the primary beneficiary disclaims the money, the 401(k) account automatically goes to the contingent beneficiary.

If there is no contingent beneficiary on the account, the money would be paid into X's estate. Your estate is always the default beneficiary on a retirement account if you neglected to name one.

If the 401(k) account is paid to X's estate, it will go to the heirs he named in his will.

And what if X left no will? In that case, his estate will be distributed according to his state's intestacy law. In most states, that means it will be divided between his surviving spouse and children. In other words, his separated-but-not-divorced wife is probably one of the intestate heirs.

I'm not sure whether an intestate heir can disclaim an inheritance. If she can, that might work out okay if X wanted the money to go to his children. But a disclaimer won't have the desired result if X wanted to leave the account to his second cousin, or to his new sweetheart. Intestacy laws have a strict pecking order; and they make no provision for your nearest and dearest who aren't also your blood relatives.

Even in the best case scenario, X's family will have to pay a lawyer to sort all this out. And if the heirs end up getting the 401(k) money through X's estate, it will be on less favorable tax terms than if they'd inherited as named beneficiaries on the account.

The bottom line: This is another telling example of why you should keep your 401(k) account beneficiary designations up to date!

 ** My original post didn't include this caveat. A 401(k) plan's rules can never be more liberal that what is permitted by law, but they can be, and sometimes are, more restrictive.

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

(c) Lynn Brenner, All Rights Reserved