Traditional IRAs Are Not Like Other Assets in Your...

Traditional IRAs are subject to a unique set of complex rules. Here are 6 significant differences between IRAs and other financial assets:

1. Unless payable to an estate, IRAs do not pass through the will.

Your IRA account has a beneficiary, who will receive your IRA at death, regardless of what you state in your will or living trust.

2. Unless payable to an estate, IRAs are not subject to probate.

This can be a significant time and cost savings in states where probate is arduous.

3. IRAs receive no capital gains treatment.

Any distributions from an IRA are taxed as ordinary income and not at lower capital gains tax rates.

4. IRAs receive no step-up in cost basis upon death.

Most other assets owned by an individual receive a step-up in cost basis upon the death of the person, eliminating all capital gains on those assets up to that point in time. But not IRAs. The beneficiary of your IRA will pay ordinary income tax on any distributions at his or her rate.

5. In most cases, IRAs cannot be gifted.

If you want to give some of your IRA to an individual or organization, you must first take a distribution, pay the income tax and any applicable penalties, and then make the gift. There has been an exception to this rule in the past, called the Qualified Charitable Distribution (QCD), for those over age 70? giving $100,000 or less to a qualified charity. This exception expired at the end of 2013, but may be renewed by Congress.

6. Traditional IRAs are the only asset in your estate subject to Required Minimum Distributions (RMDs).

RMDs apply to you and your beneficiary at your passing. The rules for RMDs are particularly complex, and depend on whether the beneficiary is your spouse, your age difference (if the beneficiary is your spouse), and whether you had started taking your RMD before your passing. While the IRS is content for you to have deferred growth in your IRA for many years, in the year in which you turn 70?, you are required to take a portion of your IRA and pay ordinary income tax on it. These RMDs continue annually thereafter.