Retirement > 401(k)s & IRAs
Six IRA questions to ask
August 9, 2000: 12:46 p.m. ET

Do your homework before you open an IRA at a bank, broker or fund company
By Ed Slott
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NEW YORK (CNNfn) - Before you open up an IRA at your bank, broker or mutual fund company, you should know that they are not all alike.

Each of these financial institutions that hold your IRA are known as your "IRA Custodian" and they can have their own regulations.

graphicMost consumers think these institutions all have the same rules, and they don't know they should ask questions before they open an IRA.

But the fact is that the IRS rules and the policy of these financial institutions often are not the same. This doesn't mean that these institutions do not follow the IRS rules. What it means is that they have different interpretations of IRS provisions.

Here are six key questions you should ask every IRA custodian before you deposit your IRA money with them:

1. Do you keep a beneficiary form on file and how do you obtain a copy?

The most important part of IRA planning is to properly name a beneficiary by your Required Beginning Date, which is April 1 of the year following the year you turn 70 1/2 years old. That is the key to getting the most out of your IRA.

You want to know how they keep track of these beneficiary forms. You should only deal with an IRA custodian that can provide you with an acknowledged copy of your beneficiary form.

This way, you don't have to rely on the bank, broker or mutual fund company to keep these forms on file. If you have an acknowledged copy, it will be under your control and the beneficiaries can more easily obtain that key form from you.

2. What are your default provisions?

Hopefully you will never have to rely on a default provision. The default provisions come into effect if you neglect to elect your own choices. For example, if you don't name a beneficiary, the IRA custodian will elect one for you.

Of course, it's always better for you to make your own choices, but many times people do not make elections or neglect planning and have to rely on the default provision of the IRA custodian.

You want to know what the default provisions are, especially relating to beneficiary designation and life expectancy. You want to deal with a financial institution that defaults not to your estate if you neglect to name a beneficiary, but to your spouse if you're married and your children if unmarried.

This way, you have two lines of defense before your IRA ever gets paid to your estate. As far as the distribution method is concerned, you want to deal with a financial institution that defaults not to single life/Recalculation but to joint life/Term Certain. (Click here to read more about these methods in another recent column).

3. Ask your IRA custodian if they will allow your beneficiary to move his or her inherited IRA to another financial institution.

It's important to ask this question, because after your death, your beneficiary may not be satisfied with the investments at your IRA custodian and may want to move to a different institution. Will the institution let him or her move the money in a trustee-to-trustee transfer? Chances are the institution will let them move the money but may pay them out directly.

If it's a non-spouse beneficiary that's paid out directly, a non-spouse cannot roll over and will be forced to take a taxable distribution. So the real question a non-spouse beneficiary (for example, a child) must know, is that if that child wants to move to a new institution, will your institution allow a trustee-to-trustee transfer to a new institution. If not, you could have a problem if your beneficiaries want to change investments.

4. Do you accept customized beneficiaries forms?

Unfortunately, many of the beneficiary forms provided by the IRA custodians just don't have enough information to work well with your overall estate plan. For example, some of them don't even give you enough room if you have more than two or three beneficiaries or contingent beneficiaries. For that reason, many people are attaching customized beneficiary forms to include multiple beneficiaries and other provisions that may not be included on the generic IRA custodian's beneficiary form.

5. Will your institution force a required distribution?

If you have passed your Required Beginning Date, and are subject to required distributions but want to move some money to another IRA account, will your institution force a required distribution? They don't have to, but many of them do.

Here's the situation. Let's say you want to move money from your IRA institution to another IRA institution. Your institution may say we'll let you move the money, but before we do we'll have to distribute your required distribution to you. The IRS does not require that as long as you've taken your required distribution from some other account. Buts some banks, brokers and fund companies will force a required distribution even if you've already taken it out from another IRA.

This will cause you to deplete your IRA faster than necessary. This is something you want to check with the bank. There are institutions that will allow you to transfer to another institution even after your Required Beginning Date and not force you to withdraw the required distribution if you can provide confirmation that you've taken your required distribution from some other IRA account.

6. Can I split IRA accounts?

This is one of the most effective strategies for overall income tax and estate planning. However, there are financial institutions that while they may let you split, they may not allow different beneficiaries. That's the advantage of splitting -- to allow different beneficiaries on different accounts. Find out if your IRA institution will let you split accounts and if they do, will they let you have different beneficiaries on each account.

Read Ed Slott's recent columns on the three most important decisions you'll make with your IRA: Choosing a beneficiary; picking a life expectancy and picking a distribution method.

Ask for the "Plan Document"

These six items alone can have a dramatic impact on how long your IRA outlives you. But they have to be addressed before you invest and open an IRA account with any institution. You may find that when you ask these questions the people you're dealing with at the financial institutions may not even be aware of their own default provisions.

But you have to be aware in order to have a plan that you can rely on. You may have to go further up the line to find somebody who does know the answers or if nobody can seem to give you any information, ask for a copy of what's called their "Plan Document" which is the master prototype plan for all their IRA accounts.

It's a little tough to read but at least you can look at it for yourself or have an adviser look at it for you to make sure these items are covered before you invest. Back to top


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