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The Inherited IRA - Part 2


Who wouldn’t like to pass their remaining assets to their beneficiaries in the most advantageous manner ever?  (Although many of us want to spend our last cent on our deathbed, that would be a little too close for comfort?)

Anyone who has an IRA or expects to inherit an IRA has responsibilities.  But so does the advisor on the account, or in the absence of an advisor, the custodian of the account.  Toda we look at the Advisor/Custodian side, and a little about the government that sets many of the rules.

The Financial Advisor (or custodian) side:

  • Whether or not a financial advisor accepts and honors the fiduciary code, it is incumbent on the advisor to understand the rules of inheriting IRAs
  • At a minimum, the advisor must inform the client of the various possibilities
  • Beneficiaries cannot be expected to know the rules and possibilities to turn the inheritance into a long-term retirement planning asset
  • The client should be told to help educate the beneficiaries
  • If there is no advisor on the account of the deceased, the custodian of the funds should notify beneficiaries of their rights and responsibilities, at least upon the death of the owner
  • A good advisor will have worked with his or her client during life to be sure the client imparts needed information to the spouse, children and/or any other intended beneficiary
  • Inheriting an IRA is relatively easy, but if any mistake is made the opportunity is lost
  • There are no Mulligans on the paperwork
  • Advisors and custodians should be aware of Beneficiary Designations, being sure that they are not only available, but also up to date

Responsibilities – The Government Side

  • In order to understand the rule-making process, you should understand the conflicting goals of the ruling class, oops, elected officials
  • On the good side, government established the ability of the individual to create and maintain retirement accounts
  • Given the desperate straights of the Social Security System, it is a good thing for all of us to supplement our Social Security benefits
  • They gave us an economic incentive to save, in that (non-Roth) contributions receive a current income tax deduction for most taxpayers
  • With the advent of the Roth IRA, the government accommodated younger savers who may not be in a high tax bracket, or may want to use the funds before long to buy a home
  • But there are changes in the wind
  • This government (I blame both sides) is starved for cash – just ask them!
  • Our “leaders” have proposed changes to the treatment of IRAs in general, and especially to Inherited IRAs
  • And I AM NOT HAPPY
  • Remember the “stretch IRA” I mentioned earlier?
  • The President’s own budget would take away our ability to stretch an Inherited IRA (except for current spouses)
  • The so-called “5-year rule” would dominate, meaning that the longest we could use an IIRA is 5 years before having it 100% paid out and taxed
  • His budget would also eliminate contributions for anyone with $3.4 Million in aggregate retirement account balances
  • More about this next week
  • From the Government Side, you are a potential cash cow
  • Don’t change your plans due to what COULD happen, but pay attention
  • Fight that battle at the polls

Conclusion:

  • It is time to discuss how to inherit an IRA “right:”
  • First, doing it “right” means doing it right for you
  • Not everyone should be expected to inherit an IRA and put it to the best long-term advantage possible
  • People are all different, and some are hopelessly devoid of long-term financial thinking, and others are simply broke and need the funds
  • But don’t expect the best to happen without the information being known
  • On the radio show my purpose is never to tell people exactly HOW to do something
  • Rather, it is to inform people what can be done, and then where they can find the help needed to do it right
  • Because it CAN be done right doesn’t mean that it WILL be done right
  • Use a qualified CFP and call our show – it’s free