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You have done your planning to make an IRA contribution or Roth IRA conversion and visit your broker to complete the paperwork to make the magic happen. You're given a myriad of documents to complete to set the account up, provide funding details and selecting a beneficiary. You start to gather your things to leave and then you're handed a three page document that appears to be a lot of "boiler plate" language and your broker tells you that no signature is required. You may not be aware that this document is the contract between you and your custodian and it lays out all of the rules you have agreed to follow. Much like a qualified retirement plan, the document governs everything.

Federal tax law gives you the structure to make the choices available to IRA accounts, but every IRA custodian does not need to provide you all of those choices. While many of us will not look at the IRA document/contract, or even read it, there are some critical items you should look for in this agreement.

  • Can you name a secondary beneficiary or allow your primary beneficiary to name a successor beneficiary? Some IRA custodians allow a secondary beneficiary election but most do not provide an opportunity for the beneficiary to name a successor beneficiary. The default likely goes to the estate of the beneficiary which results in the loss of stretch benefits.
  • Does the IRA custodian allow a trust as a beneficiary? Will they honor a disclaimer or accept a power of attorney (POA) election? IRA custodians do not have to accept these documents or follow instructions from a trustee or POA designate.
  • If a non-spouse beneficiary is selected, can that beneficiary move the inherited IRA account to a custodian of their liking? Many custodians will not allow trustee-to-trustee transfers and will only issue a check payable to the beneficiary. Because non-spouse beneficiaries are not able to use the 60 day rollover rule, any distribution to them becomes immediately taxable and any stretch benefit is lost.

In many cases these issues can be managed when the problem is known. It is the unknown event that throws all of your good planning out the window. For help with IRA planning and guidance, contact us in one of our many locations