I want to personally welcome you back to this
important and emerging field of personal finance that has for
the most part, been ignored by banks, brokerage firms and
insurance companies to date. Most of these financial
institutions do a good job of helping
you accumulate wealth inside a tax deferred wrapper such
as an IRA - but very few seem to care much about what
happens when you die.
consultants all around the country remain frustrated that many
financial advisers push you into investment and insurance products that trap
your heirs at death with poor beneficiary elections and in
some cases, poor choices for surviving beneficiaries.
Make no mistake, the
newly passed SECURE ACT drastically changed the rules for inheriting
someone's IRA. The quick way to say it is YOU HAVE 10
YEARS to pay the taxes on the money you just inherited, unless
you are a spouse of the decedent.
Now, if you are doing
your estate planning and still amongst the living, the quick
way to inform you of these BIG changes is to say you have a
few more years to be forced to take your RMD's (1.5 years more
now age 72).
And you will need to review
your entire estate plan and legal documents now to be sure
they don't specify law regarding your retirement funds that no
Family is special. If you are an heir, the best way you can honor
your loved one who left their IRA to you is to be diligent
now on how you treat the
money. Treat it like they did while they were still
alive. I am dedicated to helping you do that with vast
knowledge and experience. My
multi-licensing and business associations with other
top Inherited IRA advisers guarantees you will now be
reading some of the best content on inherited IRA's in this
"registered guest" section. (And I remind you at
no cost or obligation)
Just remember that this
information has to remain general
in nature as each specific case my firm takes under a
"client" retainer relationship has twists and turns that can not be
known until all the facts are discovered. Once the
facts are known, one can just simply follow procedures with
paperwork submission and follow up to transact a successful
inherited IRA transfer. If your inherited account now
pending doesn't pay a living trust, your estate management
tasks will undoubtedly be more simple than if it is.
A caution is in order if you are a
"do it yourselfer"
-- Run your final decisions by me or
another qualified Inherited IRA consultant before taking
action. The cost factors
to do that are small. That
way, any mistake you might make can be corrected
BEFORE damages can result.
Those receiving an Inherited IRA account
who want professional guidance from the onset can employ my
at any level. We can simply review your own steps. Or,
we can perform all steps* for you or anything in between.
That way, you can continue to enjoy life and you won't have to
make hard decisions all alone on what may be hundreds of
thousands of inherited retirement dollars now in your control
as estate manager.
* Noting actual document signing and
final decisions would still rest with you.
Regardless, I strongly
suggest you include my legal consulting partner Dr. Gefter as profiled on our introductory page in
all work performed for you, especially if any legal issues
exist. Even if you are a CPA or attorney as
an heir or just representing
your client for Inherited IRA funds, you should
seriously seek our joint counsel before you make hard
decisions for yourself or your client just to be careful. (YES, IT'S THAT COMPLICATED.)
Here's A Story to Show How Easy It Is
to Make a Mistake:
A prior retained client case back in October 2012
had a 9 point IRA "Procedures" list drafted by the
family east coast estate
lawyer for the IRA beneficiaries.
This was a very distinguished
lawyer who reminded me in a short conversation that he had a "high" hourly billing
rate. Yet, I found two of
nine points were 100% wrong!
Since hundreds of thousands of IRA dollars
were involved, I was shocked to see the notations he made
heirs can feel free to convert their shares into Roth IRA's,
owing the tax but preserving the tax free benefits.
he was out of his league on this subject since the IRS does not
allow ANY inherited account to be converted to Roth.
But it got worse. He also told the heirs in
his 9 point list that they could do an IRA
rollover as long as they pay the money back in 60 days!
Again, you can't temporarily borrow from an inherited account.
If any of the heirs followed his advice -- full taxation in
the year withdrawn would be mandatory!
Though my client (one of many named
beneficiaries) was warned in time
to scuttle the list and not follow 2 of the listed 9 points --
is other heirs may have trusted the faulty advice,
since many had signed paperwork prior to my client
Here's What We Do For
To serve your interests, my firm follows a proprietary grid of options
and procedures that goes into great detail to be sure nothing
turns out badly with the death benefit payment and the registration of your new
Inherited IRA account.
Upon request, a written
procedural "steps guide" with a check off system is provided so
you can track our work together as each step
is performed. And each task can be assigned.
Or, you can try to do it yourself and if
that is the case, I am sure the information you find on this
"registered guest" only website will help you in general terms.
You can always bring us in if it becomes too difficult. Just try to remember to do so BEFORE signing any
forms you don't totally understand.
Am I telling you that this is an
"impossible mission" if you try to do it all on
your own? No that's not what I am saying, but your odds of doing it
100% right are low without qualified help supporting or
watching your steps. My 22 years of Inherited IRA
consulting = the experience to warn you in advance.
to at least watch your back is highly recommended)
Lastly, if you desire professional
representation immediately, or at any point, or have a
specific question -- please give me a call on my direct toll
free number below. No obligation or cost for 5 minute or
less phone chats.
M.D. Anderson, President & Founder
Financial Strategies, Inc.
P.S. Don't forget about this website
when your tasks are done. Be sure to point others
that inherit retirement money to this information website.
You will be doing them a
Important Notes Before You Begin It kind of comes down
to who you listen to now. Your parent's former adviser, or the advisers that
work on inherited IRA cases every day.
Are The 5 Biggest Mistakes On Inherited Accounts Don't avoid the caution
signs on these, or it could really trip you up during the funding and
administration of your Inherited IRA.
Boomers May Be At Risk! Free and loose was an
early "culture" of America's baby boomers. So, extra
attention may be required since most baby boomers are
overly trusting like their parents were.
are 10 Rules To Follow To Stay Out of Trouble Ignore
any one of these 10 rules and the
flames of Inherited IRA Hell may not be far
5 Concepts Can Help Your Inherited IRA Stay Alive for a
Long, Long Time But ignoring these concepts
could suddenly stop the tax advantages of an
inherited account at any time.
Notes Before You Begin:
Every Retirement Plan Eventually Will Be an IRA
No matter what kind of golden eggs you
have qualified assets in right now, sooner or later they
will become an IRA before you die most likely. (If not originally an
IRA) And most assuredly, after you die.
publications refer to the required minimum distributions as
"RMD" and most non IRS sources refer to it as "MRD" or
minimum required distributions. I went with the IRS
version most common on this website, but please understand
they both are acronyms for the same minimum money withdrawal action you must
out after you reach age 72, or for your heirs the year
after you die if they properly set up "inherited IRA" type
2. Most Inherited IRA Books Will
Further Confuse You
You are going to learn more here than most
books that may just confuse you. Any book published
before fall 2019 will have incorrect tax law and
applicable IRS rules stated. The inherited IRA
field is the most complicated area of financial advisory so
I have purposely tried to write in a format that will "spoon
feed" you so you don't choke on the complicated subject
matter you are about to read.
For some, you will
notice the redundancy and I apologize for it. It is
intended for you to learn and "know" what you are doing if
you try to do this on your own. And, some will get
confused just the same, but I must say, it doesn't get much
simpler than what you are about to read.
If you don't
understand the content fully, let me be the first to say you
should seek an outside (not associated with the deceased)
adviser to help you! Obviously, I hope you choose me!
3. Outside Help Is Sometimes Necessary
When my firm is hired as your consultant, sometimes an additional inherited IRA adviser must be
brought in for legal or tax issues that are beyond the scope
of my firm's advisory services. My firm is acknowledged and well
respected in this field of professional advisory. I
personally promise I will always inform you when a referral
is required. An example would be making a legal referral to
an attorney in your specific state when legal actions
might be deemed necessary. (Rare event)
FSI has made numerous referrals to other "IRA
Experts" over a long history of operation. We were
profiled in Natalie B.
Choate's Spring 2012 newsletter and know she too is keeping
an eye on our services. She may be available on
some of those insanely complicated "trust as owner" cases
that come up from time to time. We also have referred and
worked with tax and legal staff of Roth IRA expert and Attorney
and CPA - Jim Lange on past cases that needed that extra
"push". To date, all cases using additional
advisory have succeeded in accomplishing the tasks at
hand. (Normally the legal staff at the custodial firm gave in
to us without legal action)
Whatever you do, avoid these 5 mistakes on your
These Are The Five Biggest Mistakes We See On Most Inherited IRA
1. TAKING LUMP SUMS
Many financial advisers will tell you lump sum taxation is necessary
upon the death of an IRA owner,
when in fact -- most times it is not. But the human element of
grieving, or just the stress of estate management can leave
vulnerable. You may not know the right questions to ask before
signing paperwork that is not in your best interest. That
inherited IRA paperwork, which is most often "wrong" when first sent out,
WILL tax the
money instantly if a "lump sum" distribution is checked. If not
a spouse, yes you only have 10 years to pay the taxes due on
the money you inherited as a non spouse beneficiary. But that
10 years is 10 times better than 1 year when a bad advisor
tells you to cash in your IRA account inherited in a lump sum
distribution. Tax brackets often jump
wildly when you do that!
2. CUSTODIAN LIES
Well, they may not be outright lies, but untruths easily come
from the very people now holding the money. Sometimes they tell large IRA
beneficiaries that they will need to just stay on the same
Required Minimum Distribution (RMD) schedule with their
inherited IRA, as the now deceased IRA owner was on.
That makes for a real easy succession of keeping the money under
management or "in house". But, in almost
every case, it isn't true or proper!
That means instead of resetting account mortality "age" to YOUR
birth date - if you are younger, you will have to draw money out
and tax it faster than what the IRS requires.
Sometimes, we also find the custodian telling
beneficiaries that they have 5 years to take the funds out
and pay taxes on them even when the first RMD (or successive
RMD's) have already been paid out to the decedent who died.
(IRA owner) Not true at all. The five year rule does
not apply to any decedent that was already on RMD's.
In those cases, what the custodian has done has caused your
missed RMD to be subject to the IRS 50% penalty!
NOT UNDERSTANDING THE "STRETCH"
You have to get a handle on the currently allowed
concept of stretching an inherited IRA out as far as possible. RMD's run
2-6% of deposit amount depending on the beneficiaries age when an Inherited IRA is
created. Now, as long as you can earn more than that each year,
there is no depletion but instead - increases in the capital
values of the account. So, if you are married, you can stretch
out payments for your lifetime. Then, your spouse if he or she
survives can draw out payments for their lifetime by doing a
spousal rollover(ALSO CALLED TREATING IT AS IF YOUR OWN), thus never creating the "inherited IRA"
registration at all. This means you can add years to the stretch period
by doing a spousal rollover. (A spouse can also create an
Inherited IRA upon the death of a spouse, but we can not
figure out why you would ever want to do that even if the
current advisor is teilling you to)
Then upon your spouse's demise, your children
can draw out payments for 10 years if adults or 10 years after they become legal
adults per their controlling state law. Special rules apply to
non spouse beneficiaries that are less than 10 years younger
than the deceased IRA owner and for persons that are defined
as "disabled". Those rules may need court case
interruptions as they are not solid at least regarding stating
clearly who qualifies as "disabled".
Keeping your Inherited
IRA going for generations used to make a lot of sense. But
now with the new rules for 2020 and beyond, just getting it
set up to stretch paying taxes due on withdrawals at least 10
years out is important to set up properly.
4. Misunderstanding Trusts
The current misunderstanding
that is present with custodian staff regarding paying the
death benefit to a living trust is legendary and shows no sign
of letting up soon. Few IRA's should have ever been
pointed towards the family trust in the first place. But now
that the Supreme Court has ruled that individual owned
inherited IRA's are now subject to bankruptcy court "reach" as
well as exposed in general to the beneficiaries creditors -
this mistake will only get worse as more family trusts are
named as primary beneficiary by law firms drafting estate
That is because the latest
opinion is that a trust owned Inherited IRA will still exempt
the funds from "reach" since the individual did not take
possession (ownership) of the funds directly. That legal
theory has some holes in it... but if you draft a trust for
that reason, be sure you give discretionary rights to the
Trustee to maintain a "accumulation" trust for that purpose.
And watch the language about paying the trust bills and
closing it down. Can't do that if your IRA is pointed towards
the family trust or conduit trust inside a family trust. It is
always better to use a stand alone inherited IRA trust and be
willing to pay the high fee to set one up folks, understanding
it's life span may now be only 10 years. Trusts as primary
beneficiaries for disabled persons makes sense since the
stretch period may exceed 10 years possibly. And trusts are
great for protecting capital if managed properly and honestly.
Due to gross misunderstanding
by all parties, when a trust is listed to receive large IRA
-- things can go wrong --
fast. Assuming it is an IRS "qualified" trust,
you won't be able to
use your own age...unless you are the only beneficiary.
You see, multiple sub-trusts are required in the actual instrument to leave IRA
money "per beneficiary", otherwise
ALL Required Minimum Distributions (RMD's) will be based on the
age of the "oldest"
beneficiary listed. (Pray it's not your 85 year old Uncle...)
The trust needs to be a "conduit" trust to be
most effective as a recipient of IRA death claim proceeds. And,
it must be deemed "see through" by passing 4 distinct IRS
rules -- all to reset the age basis for those IRS required
withdrawals you must start taking the year after the year of the
death. Even still, the trust must allow for trust continuation terms that do not
conflict with non IRA asset distributions. The new
Secure Act did not change "see through" rules for trusts.
5. Making Decisions Too Fast or Too
Timing is the key. After the
death of the loved one leaving the IRA account or accounts --
take the proper time to grieve. Then start researching
your options early as a few deadlines loom. One is to remove
any mandatory RMD from the account (you can take it from just
one account if multiple accounts exist) before you try to take
possession in your name as an inherited IRA.
forget the deadlines the year after death, especially if the
death was late in the year. Time can run quickly settling an
estate. Two areas must be addressed the year after death.
First, the beneficiaries have to be "purified" by September
30th of the year following death. This just means if any
listed beneficiary would disqualify the trust from receiving
IRS "qualified" status, it can be remedied if you remove that
beneficiary or pay them out before this deadline.
Another deadline looms in trust owned IRA scenarios. You
must be sure the trust documents are in the hands of the
custodian by October 31st, in the year following death.
And most times, certify as Successor Trustee in writing that
you deem the trust "see through" per IRS rules. Otherwise, the
custodians out there have a bad habit of telling you a
"Private Letter Ruling" (PLR) from the IRS is required before
they can act. If a custodian just told you that before
reading this web page, please call me.
Your father left a large IRA to be paid 1/2 to his living
trust and the other 1/2 to a local charity. The charity
must be paid out by September 30th in the year after death
otherwise the trust will be disqualified for "see through"
"Qualified" status is an IRS term that
means the trust that receives the beneficiary payout must meet
4 specific rules in order to be treated as if it was an
"individual" for RMD purposes. In a perfect world, that
means you get professional trust management and long
endearment from your loved one for income payout (though
taxable) as well as potential money management -- all these
benefits plus resetting the RMD age to hopefully, younger
beneficiaries. (The age of the oldest trust beneficiary
dictates RMD for ALL trust beneficiaries)
Don't name your children with your father or grandfather as
trust beneficiaries if a large IRA is made payable to your
What is "see through" status? Simply, it
means the trust can be disregarded for RMD purposes and the
IRS will only see the listed trust beneficiaries instead as
IRA beneficiary/ies. But now the 10 year payout rule will
apply if any trust beneficiary can not be granted an
exception. Custom IRA stand alone trusts more than ever
should create sub-trusts for each child to be able to
determine status if any child is disabled prior to the death
of the IRA owner.
You can also sign paperwork too
quickly that is pushed upon you by the former financial
advisers who will want to make a new "sale" on YOUR money.
This can happen in just weeks after the death if you don't
guard against it. You have at least a year to do anything.
Don't let anyone push you into doing
something you don't understand --
until you fully DO understand what you
You can read more about some
cases with faulty trusts in the Wall
of Shame website page.
out what it is like dealing with an insurance company who doesn't know which end
is "up" when it comes to proper administration of an IRA death claim.
Or, experience the frustration
of having a sister with sticky fingers. Instead of protecting the family trust
wealth as Successor Trustee -- she is spending it!
Back on 12/28/10, the Boston Herald
quoted that 10,000 baby boomers in 2011 will hit retirement
age each day -- for the next 19 years! Adding in their own
401-k, SEP, 403(b) money with what they inherit from
parents, the total sum for some families will be
overwhelmingly the highest percentage of their estate
What is important here is to note that too many
investment only advisers are just
plain ignorant about the taxation issues! And, because they are not
tax experts, and few are inherited IRA experts (though some took a
class that says they are), bad things are happening as
this money comes out of the estate settlement process.
firms farm accounting tasks out to CPA's on larger estates.
Even CPA's have been sleepy, but they are waking up fast!
Many professional tax advisers read this information site and respond to me
they can count on the information I publish.
Instead of using the
"S -- T -- R -- E -- T -- C -- H"
IRA concept (albeit shortened to just 10 years for
most now) and investing in a new "Inherited IRA" account
with the current or proposed account heir -- still too
many money advisers often tell the heir after the death to pay taxes on the
money and invest the rest with them! (Lump sum = Big Tax
This can amount to a
quick 40% cut for the IRS and state taxing authority and a 60%
remaining cut for the new account owner. Many times,
professional advisory isn't sought out at all. Needless taxes are
paid on these IRA transfers that often are very large
-- and Inherited IRA Hell stays very busy
with new arrivals of victims every day!
O.K., boomers, you may still be wild and
crazy and trying to relive your youth any way you can. But
not being careful with your own retirement money, or the
money you inherit from a parent, especially IRA money -
well it may be an expensive trip sort of speak you will
I want to warn you of a
pitfall. Insurance agents run big ads in the
paper and in magazines hoping baby boomers will respond.
The message tells you to sell out your IRA
accounts. (Traditional or inherited) They can easily
trick you to think you should pay the tax, and invest what
is left with them. And the product they are pushing is
nothing more than permanent life insurance with big
commissions to you and a big tax bill for you.
These simple, greedy salesman disguise
themselves as "wealth advisors" which sadly, translates in the
real world to "insurance agent". They ignore or else don't
have the mental ability to understand the concept
of a potential perpetual and increasing income stream for almost an entire
lifetime. And another lifetime as well if you leave your IRA
money to an inherited IRA for your children.
The longer government
standardized mortality tables (Newest is the 2017 CSO
Mortality Tables) just made it even more lucrative to keep this
money tax deferred all of your life and then let your
children continue your Inherited IRA balance after you are done
using it for at least another 10 years under the new law. DON'T BUY WHAT THEY ARE SELLING
AND LUMP SUM CASH IN YOUR IRA! . It is
illegal to present life insurance as an investment, so don't
become a victim just because the salesman has a slick
presentation and a silver tongue.
10 Rules To Follow For Best Results
Rule # 1:
Cross Check the Facts
It is best to understand that the information you receive from the
institution that is custodian of the deceased IRA account is
probably wrong! Seek another opinion from another
qualified professional inherited IRA consultant independent of the firm just to be
sure you get the facts right before you accept
and execute documents with the current custodian.
Rule # 2:
Register the New Account Properly
Multiple beneficiaries holding
the same account would be in the "plural" for registration
purposes. Also, note the words "Inherited" or "Beneficiary"
are commonly placed in front of the word "IRA", depending on
Trust registrations are more complicated and are
not produced here for that reason. Registrations are
commonly truncated due to database limitations of
institutional firms. The IRS fully supports any
truncation as long as it is reasonably possible to still
determine the account title name.
Examples of non-trust proper titles for
Inherited IRA's will vary with the different institutions
who hold the money or who you transfer the money to.
All of these would be options acceptable by IRS standards
depending on which firm you are with (or go to):
"IRA FBO Fred Jones as
beneficiary of John Jones"
"IRA FBO Fred Jones
(Beneficiary) of John Jones (Deceased)"
"Decedent IRA FBO Fred Jones,
beneficiary of John Jones."
Or starting with "Inherited IRA... "
Or starting with "Beneficiary IRA... "
Truncated Sample: "IRA
FBO F. Jones (Ben.); of J. Jones (Dec.)"
Tip: Never let
the decedent's name be removed! If it doesn't show on
executed documents, your new inherited IRA is in violation.
If you discover this the year after the year of
registration, you better call me.
You are in Inherited IRA hell, you just don't know
Rule # 3:
Transfer Your Inherited IRA to a "More Friendly"
Custodian if you Have Problems
If you inherit an IRA that is
held with a custodian or trustee that does not allow you to
stretch distributions under the options provided by the tax
code, you can usually transfer the inherited IRA to a
custodian or trustee that does.
Try to complete the transfer
before Dec. 31 of the year that follows the year in which
the IRA owner dies, so that you can make any required
RMD elections on time under the new IRA agreement. Always move the
money via a trustee-to-trustee transfer. Trying to do a 60
day rollover will cause instant lump sum distribution rules
and instant taxation. (Inherited accounts don't have that
Normally, only 401-k accounts
which recently became eligible for inherited IRS status are
sometimes restricted by the trustee on whether non taxable
transfers are allowed. Sometimes, the "agreement" with
the company may restrict you. For example, a client of
ours was forced in 2014 to take over $400,000 of taxable
income from a GM 401-k plan for his deceased mother all
because they didn't allow rollovers in that particular case
which was payable his deceased mother's estate.
discover 401-k plan money for your deceased loved one who
was also born before 1936 -- check with my firm to
see if special IRS 10 year averaging applies. This
option allows cashing in with lower tax rates on the
distribution you receive as well as special capital gains
tax rates for any pre 1974 contributions made into the plan.
It may extend to you as a beneficiary inheriting the IRA,
but specific checks must be performed to determine your
If 10 year averaging doesn't apply,
may still be eligible for a 5 year payout to reduce the big
bite of taxes on a lump sum distribution, but only if the
decedent died before reaching age 72.
The facts of your
case must be reviewed by a professional inherited IRA adviser
before options can be fully discovered and tailored to your
Rule # 4:
Excluding the Decedent's Name from the Registration does not
Necessarily Make the Amount Taxable
popular belief, transferring the assets into your own
non-inherited IRA account does not necessarily result in the
amount being taxable. It's true that the IRS requires the
inherited IRA to be registered in the combined names of the
decedent and the beneficiary. However, if the assets were
transferred into an IRA in just the beneficiary's name, that
can be easily corrected as long as the funds are not
commingled with non-inherited-IRA assets.
In other words, if you
transfer it into a non-inherited IRA account that was
already funded, it is too late and you are in
Hell by default most likely. As long as it was a new account
that wrongly forgot to include the name of the decedent, the
correction can be accomplished by simply adding the name of
the decedent to the registration by the firm.
Be sure to
have this mistake corrected before
they have to report the status to the IRS by the end of the
calendar year. Under federal mandated tax statutes that apply, automatic account reporting
has been required since the late 1990's.
5: Distributions from Inherited IRAs are not
Subject to the 10% IRS Penalty
Distributions from inherited
IRAs are not subject to the 10% early distribution penalty,
regardless of the age of the beneficiary at the time the
distribution occurs. Also, to be sure no
penalty happens, the IRA custodian or trustee should code or
flag the inherited IRA, so that distributions are reported
as "death distributions" with a code 4 in Box 7 of IRS Form
1099-R. Without that exact coding, there is a problem
that has to be corrected
by obtaining a corrected 1099-R in order to avoid faulty tax
reporting of income.
don't let any tax adviser convince you regular inherited
RMD's are subject to the early distribution penalty.
You wouldn't believe how many
don't know this...
Rule # 6:
Stretch Your IRA!
This rule applies to all
types of IRAs as long as certain circumstances are present. But,
just address your new Inherited IRA
account here. Once you have your inherited IRA at a
beneficiary-friendly custodian or trustee, you will be using
single life expectancy chart for RMD payouts.
And the stretch period is most likely just 10 years.
But, you can determine when and
how much to take out during the 10 years. One could easily
assume that 1/10 a year of balance prior year on December 31st
was a good plan under the new law. Yet, flexibility is
important. Just don't forget that it ALL HAS TO BE OUT by the
end of the 10th year now.
The long super stretch on a
young grandchild of 80 years or more is over.
Rule # 7:
Watch the RMD IRS Requirements and Trustee Rules
Your inherited IRA trustee doesn't
always allow what the tax code and the IRS allow. The tax
code and IRS regulations allow the beneficiary two sets of
distribution options for inherited IRAs:
Option 1. If the IRA owner dies
before the required beginning date (RBD), for required
minimum distributions (RMD) -- the beneficiary can
distribute the assets within five years of the owner's
death, or over the new 10 year period as well if set up on
time. It is the opposite of taking
out a mortgage for 15 years instead of 30 which was
traditional in the past. Stretch IRA withdrawals out as long
as you can.
2. If the IRA owner dies on
or after the required beginning date, the beneficiary can
take distributions over the 10 year period, unless a spouse
who can re-date the payouts to match his or her life
expectancy (treat it as his/her own), thus stretching the
payouts further than 10 years.
The problem is that not all
IRA agreements (offered by the trustee) allow these options.
In fact, it is quite surprising just how limited some
trustee agreements are. In April, 2012, our firm
discovered a brokerage firm that had to create inherited IRA
paperwork, just to pay the death claim for our retained
client. Custodians can force you to take a
distribution within one year of the original owner's death
if you don't challenge them. (We provide the legal referrals
to do that) (This was even covered in a Wall Street
Journal interview done April 2012 by Mr. Anderson)
Also, you have to be careful
if the original IRA owner (the decedent) was required to
take a distribution in the year of death and didn't. Then
the beneficiary must take it before any re-registrations of
the inherited IRA account (or transfers) takes place.
(Insurance agents also call this the "death claim" filing or
To be sure you are
informed on tax law regarding IRA's, you can find the rules
about distributions in
Tip: It is smart
to check this stuff out BEFORE signing paperwork! If
you don't like the terms, go back to the # 3 rule above! But
hire us to assist you as the process is onerous. And
dangerous without professional guidance each step of the
way! (Inherited IRA Hell
awaits those that fail to abide by this rule more often then
you might think)
8: Inherited IRAs Cannot Be Commingled
Be sure you keep any
inherited IRA funds separate from your own. You are not
allowed to combine inherited IRAs of different types. For
instance, you cannot combine a traditional inherited IRA and
a Roth inherited IRA, even if they were both inherited from
the same person.
Also, if you inherit multiple
IRAs from the same person you can combine those IRAs
into one inherited IRA account. But, you cannot
combine assets inherited from different individuals into the
same inherited IRA account.
9: Don't Try a 60 Day Rollover
Remember there is
no 60 day
rollover period since there is no constructive receipt of
the funds. With Traditional or Roth IRA's you may own,
you can take a distribution out and put it back into the
account as long as you do so in a 60 day time period.
Using the IRS 60 day rollover
procedure for short term
expenses perhaps, the IRS allows you to avoid taxation and
penalty. Try this with an Inherited IRA and
there is a 100% chance the IRS will tax it. (And the
IRS will also know
about it because the institution by federal law must
report end of year value and status directly to them!)
financial reporter told me she was told by an IRS enrolled
agent that YOU CAN use the 60 day rollover provisions on
I hope he has good E&O insurance...
10: Maintain Proper Beneficiary Elections on Your
The beneficiary form on an IRA is the first
and most important part of receiving the death benefit
payout from an inherited IRA. If your loved one failed
to name a "living and well" beneficiary on their own
beneficiary form the "stretch" concept may be
restricted. I will assume for this rule,
that they did name you properly as one of the beneficiaries,
or as the sole beneficiary.
suggest ways to customize your beneficiary form, perhaps
adding some important legal language that further protects
who gets what when you pass away. This is done as a licensed
and certified document preparer (In the State of Arizona)
and we must be assigned as a "paralegal" to your legal
representative to perform this service for you, if you are
not a resident of Arizona. We
must consult directly with your legal professional in your
state. (FSI is not a
law firm, nor do we practice law. Instead, we refer legal
questions and needs to some of the best Inherited IRA
professionals in the United States. Actually, they are the
book writers -- and are the best!!!)
After becoming the owner of
an inherited IRA, you have to think about how that account
fits into your own estate plan and financial matrix. Deaths,
divorces, remarriages or the birth of children are reasons
to re-evaluate who the beneficiaries are on your inherited
IRA account as time marches on. And to consider the legal
protection afforded, and recently re-determined by an
Arizona court, to use your IRA or inherited IRA as an asset
protection device from creditors. (Most other state
challenges to date, also conclude IRA funds, even when
inherited, are exempt from creditor claims)
Closing Note About the Rules:
In some cases, you might want to "disclaim" the IRA you've
been notified you have inherited according to some legal
experts. All of these scenarios require a valid contingent
or secondary beneficiary to be listed and available. (alive
and well) Cases where this may be practical would be:
1. To keep the inheritance
out of your estate for estate tax purposes. (WHICH MEANS YOU
ARE LOADED MONEY WISE)
2. Depending on state
law, to keep the inheritance from being subject to your
creditors or state inheritance tax imposed by some states.
3. To save income taxes if
the contingent beneficiary is in a lower income tax bracket.
4. To get the IRA to the
deceased IRA owner's surviving spouse (perhaps as the contingent
beneficiary) so he or she can roll it over, name new
beneficiaries, and thus -- get a longer stretch-out period.
And possibly so they can convert to a Roth or so that the funds will qualify
for the marital deduction under the estate tax laws.
Tip: I can help by making a professional referral to a
qualified Inherited IRA lawyer if you need their legal
services in this area of discussion. All of these
cases for a legal "disclaimer" would warrant
a reason to have a professional legal
conference. (And most likely other
scenarios not mentioned here)
5 Inherited IRA Management Concepts To Assure Long Life Of
Once You Avoid First Year Taxation,
Proper Management Begins. And, It Never Can End!
Now wait, before you think about just paying the tax and
being done with it -- it isn't that big of a deal to learn
and practice proper Inherited IRA management. Especially if
you find an IRA expert that is around your age or younger to
be able to help you many years into the future whenever laws
or circumstances change. This tether to an adviser could
cost a little in advisory fees, but as you are about to
learn, the true secret of why management is so important is
coming up next.
If you live to 103, where will your money be? With you
yet.... or long gone? Planning for lifetime income from your
Inherited IRA should be done right now. They say the
difference between an old man and a gentleman, is just a few
bucks in his pocket! It is true, and you need to set you and
even your survivors up for life! (Or at least keep your
Uncle Sam at bay as many years as possible here)
You are about to learn why a stretch Inherited IRA is
just about the hottest ticket you can hold to family wealth
in the case of large Inherited IRA accounts. Once set up
with the right adviser and the right trustee (institution/custodian), proper management secrets can all but guarantee
At this point, I assume you have figured out you are not
in Inherited IRA Hell, at least not yet. If you are close,
you won't be the first I have helped pull back from the
flames licking at them!
But, if you think you ARE in
Inherited IRA Hell, you
probably are now calling your attorney. Or, crying a lot at
the very least. Just don't forget to let me know the
situation too. Sometimes people and/or their advisers misconstrue
the deadlines and the rules and still cause themselves
needless stress or eventual taxation.
As long as the
check isn't cashed, I would almost be willing to bet you
still have some wiggle room...
CONCEPT # 1:
Drawing Down Principal In
The Early or Mid Years of the Account Would Be a Grave
I admit, I grew up watching Gunsmoke on TV and if any man
knew when it was the right time to draw out his gun, it was
Marshall Dillon! Well, I want to use Matt as the mental
picture you must imprint in your mind about how and when to
draw money out of your new Inherited IRA.
IRA withdrawals should only be pulled out when you
desperately need them. (beyond RMD)
Unlike the accumulation years and retirement
years the original retirement plan owner enjoyed tax deferred
growth in the account/s, the new Secure act may limit your
entire time to remove all Inherited funds in just 10 years.
This concept doesn't work well in that case.
However, if as an Inherited
IRA beneficiary, you are one of the exceptions, the concept
applies since you should have your entire life expectancy to
withdraw all funds from an inherited IRA account.
If you just re-titled your inherited IRA
account and find your deceased owners' name is not on
your new account, (if your new institution or account
removed the original IRA owners' name, you are are very
close to being in Inherited
IRA Hell -- be sure the deceased name is put
you need to get that changed right away, before they report
it to the IRS at the end of the year!
Now, the truth concept so important in the
management of you new account:
DON'T EVER REDUCE THE PRINCIPAL YOU
If you have more than 10 years to stretch
your inherited IRA payments, you now have complete and total control of the funds
(or will once you hire us to assist you). And,
you are ready for this truth. Said another way, "don't cut
off the hand that feeds you". The minute you begin to deplete principal, your days of
ever increasing income on an ever increasing principal base
are numbered! So, if you have all or part of your Inherited
IRA in a fixed bank or insurance annuity account, just don't
ever pull out anything but interest earnings for as long as
Obviously on low earnings accounts (both
fixed and variable), RMD can deplete principal. But,
you always have the option to shop around for better rates
or terms to get the performance up so principal can remain
in tact or better yet -- grow with interest earned above the
annual RMD withdrawals.
CONCEPT # 2: Make This No-No on a
Securities Account and Watch Your Retirement Income Die Long
Before You Do!
concept is kind of a continuation of the first, but it
applies only to variable type accounts.
Namely, you have
to adjust for losses drastically or the loss, especially
incurred early on while paying out retirement income, will
destroy the very "money tree" that can otherwise feed
lifetime income to you and your own named beneficiaries of
your inherited IRA account.
Failure in this area can commence any
year values drop, yet many
advisers and their clients remain unaware and don't adjust. But it may be early
enough to catch the mistake before it gets too serious to
stop, in your specific case. This whole field of specialized
Inherited IRA advisory is still new and emerging so there
isn't a big rule book on actual practice you can seek out
and find easily. (If I write one some day - would
you buy it?)
Your grandfather and great grandfather knew the
concept real well! You don't spend more than you make while
you are earning a living. And, you don't spend more than you
earn in interest and dividends, once you retire! Failure to
adhere to this -- the oldest and wisest of money concepts spells early death of
the account! (Maybe the U.S. Government should be
I am going to show a chilling example so you can grasp
this one at full value. If this shakes you up and maybe
wakes you up as much as it did me, I would declare that your
time has been well spent reading my free information!
In this example, the client has retired on a $100,000
nest egg Inherited IRA (could be any kind of account as
well) that avoided immediate taxation because of having a
smart money adviser. His money is in a brokerage account
averaging 12% a year for a 10 year period and the client is
taking out an annual 12% withdrawal for retirement income or
combined RMD and additional retirement income purposes.
Now remember, this
example below applies mostly to those who received an
exception under the new Secure Act provisions.
The question is this:
How much money would the client
have in this Inherited IRA at the end of 10 years?
ANSWER IS: $40,641!!!
I'm sure your answer may very well be the same as mine
was, when this example was proposed to me. I answered
"$100,000!!! After all, for those of us from IOWA that
learned that mental math so well -- it is the only
But, in this example, it is very wrong!
You see, one
little detail was left out. I didn't yet tell you that in
the first year of the $12,000 withdrawals, an average loss
in the portfolio occurred in the amount of -10.5%.
Here is what actually happens when an
assumes you need to use an "accumulation" portfolio strategy
when in fact you may very well need a "guaranteed or
partially guaranteed income" portfolio strategy:
This chart shows that a single loss in the first year --
even with nine consecutive years of double-digit
gains--causes a loss off nearly 60 percent of that $100,000
original Inherited IRA account you inherited!
In a typical "long-term" investment time frame
(cycle) of 10 years, you could
easily expect another year with a loss. Even without any
more loss in this example, your payments would stop in just
4 more years and the account would go bust! (if more
than 10 years are allowed under the Secure Act provisions)
It is easy to surmise that your Inherited IRA will die
from the 10 year forced withdrawal schedule forced upon you
now as an inherited account beneficiary if no exceptions exist
for you to qualify under. (They give you more time if you are
chronically ill, disabled, a minor child, not more than 10
years younger than the decedent IRA owner, or a spouse
treating the IRA as their own). But at least you got all your
money out. Investment loss's not recovered are like a thieve
you never catch. Remember that when you broker calls and tells
you they have a hot investment for you...
Clearly, the accumulation logic so
commonly practiced while you put aside retirement assets will not work in the
distribution phase of your retirement years. While the rules
for accumulation focus on dollar-cost-averaging, and
tax-deferred growth, the economic attributes of the
distribution phase are: guaranteed income streams, longevity
risk management, upside growth opportunity, downside
protection for life, and principal protection
(preservation). I repeat that last rule. PRINCIPAL
Send your adviser to this site if you have to, to remind
them "why" you don't want your IRA invested where the chance
of loss is very high. Or, at least adjust what you take out
so you never deplete the principal. Or, if you live in
Arizona (we also license in new states when clients
ask us to assist them in investing in fixed annuity
contracts), call me toll free at
to discuss some
refreshing options that offer stock market type returns and
guarantee NO PRINCIPAL loss by using fixed indexed annuities!
CONCEPT # 3:
What You Invest Your
Inherited IRA Money In Matters Greatly as Well as Who You
Invest It With!
Inherited IRA is a cash cow! To keep it producing income
for even if you the new 10 year rule dictates the money will
have to experience full taxation by the 10th year. After
taxation, you still will have a nice account balance most
likely which unrestricted from harsh tax rules can last your
lifetime and belong if you are careful in what you invest in.
And who you invest with.
What you decide to invest in matters. One area that I
am convinced is a good area, is in real estate. Now,
before you judge me, let me say I have an Arizona real
estate license. I am also a Realtor®
and am a member of local, State and National Real Estate
Associations. I work for a large well known real estate firm
in Tempe, Arizona.
I have to take more continued education courses
than anybody I know to keep up to date in the multiple
financial services (licensed) that I practice in. And
lastly, I have practiced in financial services and planning
for over 45 years! So, I DO understand the funding vehicle
of "real estate" as a possible choice for your IRA.
What I am talking about is a self-directed
type IRA account. They are not for everybody. But, they are
popular and custodial firms are now receiving millions of
dollars in funding so clients can go out and buy "local"
real estate properties in their own IRA accounts. Or
anywhere else for that matter!
It's true, an IRS rule prevents you from
depositing "new" money for project expenses unless they are
qualified deposits into the IRA for tax purposes. And
another rule says you can not have any "self-dealing" which
just means your self-directed plan can not benefit you and
your circle of relatives related to you. Real estate is a fine investment in the right context.
Modern financial advisers serving their client's best
interests first, now see real estate as a good home for
Few real estate ventures work out
very well when the owner is removed from the day to day
management of the project but with a self-directed plan, IRA
owners can keep their eye on what they invest in, sometimes
literally. One can buy a rental property on their own block
with their IRA and drive by it every night when they come
home from work!
Caution is needed to use IRA consultants
before investing any money into a self-directed IRA account
no matter how attractive it may look. Getting it wrong can
cause up to a 100% tax penalty! My firm is available
on retainer to review any proposal others may give you for
this, or to help you if you are researching self-directed
IRA investing into real estate at this time. And of course
the entire project may be limited to a 10 year life span since
the Inherited funds used must come out and be 100% taxed by
the end of year 10 under the Secure act. (Unless exceptions
CONCEPT # 4:
Something Drastic Happened, and Most Money
Advisers Are Still Asleep! Why Your Inherited IRA May Need
Guaranteed Income Planning!
In the past,
advisers and consumers alike were motivated
to buy investment products that could accumulate money for
their eventual retirement. The concepts were always that if
you have enough principal by the time you reach a
pre-determined retirement date, you would also have enough
interest earnings as well to pay retirement un-earned income
to yourself, along with any pensions and social security
The idea of a guaranteed income was not a preliminary
planning concept or at least it always seemed to get
overridden with "accumulation" planning. This of course
meant that the products offered to you as the investor in
the past had great accumulation potential and features -- but
was severely lacking in any kind of guaranteed options. So
you or your survivors could be reasonably assured a monthly
income check would never stop coming!
Well, the baby boom generation changed that once and for
all. This generation does not have the guaranteed pension
income their fathers had. They have their 401-k, which is
mostly their own money. And, after 2008, those accounts have
been "back dated" in values have they not? Recent
recovery of lost values and big gains as well in equity
markets could once again take a big plunge.
We already proved above
what a one time loss can do to investment money.
Baby boomers don't have as much in
accumulated assets as their parents had, and they very
likely still owe money on their home, even if they are now
nearing retirement. And sadly, credit cards in their wallets
stay a lot more active compared to their parents, who rarely would
carry a credit card balance. (or even posses the card) So, many boomers
will carry those negatives right into their retirements!
Of course, the average baby boomer inheritance from their
parent will be a nice "catch-up" money deposit for many who did
not do as well financially as their parents. But not
everyone can count on that, even if their parents or parent
have a sizeable estate. Nursing care and last illness
expense costs can easily deplete a children's
inheritance before the parent dies. (and occasionally, the
new "spouse" if widowers or widows remarry)
So baby boomers should
and must plan for the most part -- in putting together a solid
retirement package on their own. They need to get out of
debt. And, they need to find better guaranteed sources for
retirement income that will not stop producing retirement
money -- no matter what! Money trees need watering (upkeep)
to keep producing. Fail to manage your money tree during
retirement years -- and most likely -- it will manage to
fail in your absence, sooner then you might think.
Income planning is even more important when you factor in
the larger medical costs seniors have to pay out of their
pockets and the higher cost of living we all must pay just
to maintain our private residence. Yes, future income needs
of baby boomers looking at retirement in the near future are
a real and present need that can no longer be ignored by
them or their financial advisers! Guaranteed options you
can't outlive are now available by using fixed annuity
contracts. I can tell you more about that and give
you a quote if you want one, later, once you properly review
your inherited IRA options first. (coming up next)
FINAL CONCEPT #
5: Follow The Rules!
Note: These will include a
mix of the concepts I covered on this site along with
other important information you need to know. They do not
address spousal rollovers which are wrongly classified in
the press sometimes as being an inherited IRA. To be
technically correct, please note that non-spousal beneficiaries
most commonly create the inherited IRA accounts under IRS
rules. Yes, a surviving spouse could create an Inherited IRA
instead of treating the account as their own (and rollover
into their name). But why?
YOU EITHER WANT TO PROTECT YOUR IRA FUNDS WHILE STILL ALIVE
- OR AFTER AS A BENEFICIARY OF A LOVED ONE'S PLAN WHO HAS
RECENTLY PASSED AWAY. UNDERSTANDING THE NEW LAW AND WORKING
WITH AN INHERITED EXPERT WHO UNDERSTANDS THE NEW RULES IS
PARMOUNT TO GETTING THINGS SET UP CORRECTLY.
You can call me with questions at: