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The Inherited IRA - Part 1


When inheriting an IRA, there are always 4 parties involved, and sometimes there are 5.  That is why we like to call it a 4.5 sided issue. The 0.5 is for the spouse of an IRA owner, if they have one. In the next couple of weeks, we will be taking a look at what the responsibilities of each party are when inheriting an IRA.  Remember, you only have one chance to inherit an IRA, and if you choose the wrong way to do it, it can be very costly!

Party # 1 is the IRA owner, whose primary responsibility is to designate one or more beneficiaries (and to keep them current):

  • It is usually best to designate real people, rather than entities such as trusts
  • If you have a family pecking order (usually generational), designate Primary Beneficiaries, and then Contingent Beneficiaries
  • It is also helpful to understand the legal terms per capita and per stirpes, as this is a choice you have to make
  • These terms pertain to the treatment of beneficiaries and their families
  • A designation of per capita means that if that beneficiary predeceases the owner, his or her share goes to the other designated beneficiaries (the beneficiary has to be alive, or the share is lost)
  • A designation of per stirpes means that if the beneficiary predeceases the owner, the beneficiaries family will still get their portion (the deceased beneficiary’s heirs get the share)
  • Always consult legal counsel before using these beneficiary designation possibilities
  • These decisions are personal to the owner, and often are based on circumstances, such as second (or subsequent) marriages in the beneficiary ranks
  • Continuing the responsibilities of the IRA owner during life, it is very important that you educate not only yourself, but also your intended beneficiaries
  • Only by knowing what they (the beneficiaries) CAN do is it likely that they WILL do it correctly
  • And once a mistake is made, it cannot be reversed

Party #2 is the Beneficiaries:

  • If you know or suspect that IRAs exist in the family, find out for sure
  • It can’t hurt to ask, and they will probably be happy to tell you (80% of parents would like more involvement from their kids, and vice versa)
  • Ask if the Beneficiary Designations are up-to-date (in other words, are you included?)
  • Understand a few basic rules, guidelines and suggestions
  • First, the natural instinct of many beneficiaries is to take the money and run
  • They should understand that the money would be fully taxable (assuming a Traditional IRA)
  • You should also be aware that you might just pass up an incredible planning opportunity to provide for your own retirement
  • The next important thing to know is who to call when the situation arises
  • Many advisors are under-informed of the rules and possibilities the Inherited IRA offers
  • CPA and attorneys may not be well versed on the subject, either
  • They may also under-informed of the inability to correct the situation after even a small error has been made
  • Knowing what CAN be done doesn’t guarantee that it WILL be done, but the opposite is usually true

Next week we will wrap up the issue by looking at the responsibilities of the other 2.5 parties in an Inherited IRA situation.  If you want to hear about it sooner, tune into our radio station live at 10AM this Saturday on AM600 and FM100.3 in the Jacksonville market.  If you are not in the market, you can listen live on 600wbob.com or on TuneIn Radio.