Inherited IRA Management Concepts That
Need To Be Practiced To Assure Long Life!
(Of Your Account That
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)
You won't be disappointed because this truth is the most
important on how to handle a large Inherited IRA once you
have avoided all the mine fields up to this point. This is
where the wagon wheel hits the road. And, the concepts of
this truth are very, very simple.
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
You now have complete and total control of the funds. 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! And, if you
can, delay taking any more than the RMD's for as many years
as possible to try and let the account(s) grow.
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.
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 good ol' 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!
It is easy to surmise that your Inherited IRA will die
way before the 30 or 40 years it normally would last, if you
are not wise about what you invest in, and do not take
special care in preserving the capital so that it can keep
on producing income!
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 or Iowa, (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!
Or, just visit my
www.annuitymenu.com, if you like.
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 life, and even the life of those children or
grandchildren that survive you, you have to pick carefully
how you invest the money.
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
serve on an advisory council for a national senior advisory
publication. 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 36 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.
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. s a zero "basis" computation!
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
diversification purposes. 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.
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 could once again take a plunge, since may
brokers are astonished a major correction has not taken
place yet. (This was written May, 2012).
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 dump 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 only non-spousal beneficiaries create the inherited IRA under IRS
rules. And, that's why you
are here... right?
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.
Inherited IRA Truths That
May Be Too Hot To Handle By Your Current Advisers & Custodians
If you ever get your physical hands on
the money*, you have just entered
now, you most likely have figured it out. There are two
types of IRA money advisers. Those that get it right. And,
those who don't.
The first will keep you out of Inherited IRA hell. The
latter has or will put you in there. Once there, your
options are limited to taking legal action for any chance of
financial recovery. The only tax write off is your state
income taxes you paid on the taxable distribution, if you
itemize on your IRS 1040! (And perhaps your tax and legal fees)
It is a hard fact that the IRS and your state tax authority
(when applicable) will not give back your money. And the institution
caused the mandatory taxation of the inherited
IRA will not and can not reinstate the account after the
fact. Once the check is cashed. It
is set in stone! (many ask this question, knowing pretty well what the answer is!)
Now, occasionally, a firm may register
your new inherited IRA and forget to include the name of the
deceased IRA owner who left your share to you. These
situations have been modified by the firm in those cases and
most likely, the IRS is never aware of the mistake.
(Normally the IRS allows some leeway in the year of the
mistake. Of course, we know some institutions mess the
account titling up and don't correct it in the same year it
happened. That most likely constitutes "constructive
receipt" and if the IRS finds out-- they will want to tax the funds)
So, I personally
recommend you have an expert read and review the paperwork
before you sign it if you try to do this alone.
In cases of constructive receipt,
regardless of how it happened -- you could try to file and
hope for a favorable IRS
"private letter ruling", but the truth is that the IRS is
not in the business of feeling sorry for stupid mistakes
made by administration departments of financial institutions
and their employees or staff. Or by you as an ordinary tax
paying U.S. citizen!
When an IRA is payable to a
trust, there may be room for a PLR from the IRS, to correct
mistakes or language to manage the money that is often found
"missing" in our client cases. But again
circumstances need to stand between simple administration
mistakes and arguable grounds in special cases that contain
extenuating circumstances. Only the latter is worth paying
the high fee and waiting for a hopefully - favorable answer
in filing a PLR with the IRS.
* Otherwise known by the IRS as
B. Not Every Adviser is Qualified in This
Specialty Area of Practice!
current financial adviser might be worried right now if you
ask him or her straight out -- how to avoid paying any upfront
income tax on your inherited IRA account. They are worried
because most don't really specialize in this area and
therefore are prone to tell you it would be best to just pay
the taxes on the money.
It is malpractice and any
smart lawyer will be testing the limits of the adviser's E&O
liability coverage if it is later discovered by the client
that there were more options than what was offered to you.
I'm not speaking in theory but in actual practice. In
fact, a few years ago one of my clients was told by a Phoenix financial
planner that his deceased father's large IRA account
had just one option -- the heirs would have to pay the tax and
then reinvest what was left with him. Now, this case did
involve a trust as the beneficiary, so it was a complicated
matter. (But not for us)
My firm did the research and found the needed tax code
elements in the fathers' trust to authorize account
transfers according to the IRS rules. I helped find the way
to conduct the tax free transfers and then assisted in the
"drop down" re-titling to the trust beneficiaries under
"look through" provisions in the code. When it was all done,
I assisted the client so they cold perform the "drop down
and out of trust" procedure on the accounts. This allowed us to
fully close the living trust altogether, and thus, comply
with the trust termination provisions! We continue to
repeat these procedures for clientele since then, trust
case, after trust case that comes in.
Sure, it is extremely complicated. And that is the very
reason you should do full research before you authorize
anything! At the very least, you have until December 31st of
the year after the death,
as long as you don't do anything quickly with the original
account your loved one had his or her IRA in! (But if
the IRA funds are payable to a trust, don't wait until then
to start. Important reporting requirements start as soon as
Sept. 30th, the year after death)
Can you imagine the extra earnings and principal growth
for about 40 years on the instant $120,000+ I saved the
client case I mentioned? Especially when the current
had told them to give it away to the IRS and state of
Arizona tax departments? Your case could be similar, so
please don't dismiss the need for a second opinion.
This story from a few years ago had an interesting and unusual ending. I had
to call the adviser mentioned to get some details on the
case up front and was verbally abused by him over the phone. He
called me a "bean counter" and told me to stick to counting
beans and said I should not try to tell people what to do
with their money. (I wasn't) He bolstered himself as an investment
adviser professional and warned me that accountants like me
should not butt in on his advisory services.
After the case was completed and the transfers and
re-titling was done, I noticed a large ad in the Arizona
Republic newspaper about two months later. The investment
adviser was prominently promoting his merger with a CPA firm
in Phoenix and introduced a brand new company! I didn't care
to call for the details, but I can easily surmise that he
got educated real quick in this case he lost control of and
was never going to let it happen again! (RIA's hate to loose
MUM $ (money under management) even when you die!
In other words, if you are a qualified
adviser lacking in
the ability to interpret these complicated tax issues, why
create liability in guessing? I welcome your referral and
would be more than happy to work with you. And, if you can
team up with a good CPA or tax attorney in your own home area, don't ignore
the possibilities as well in doing so.
Just don't tell your
client who just inherited an IRA that they have no option
other than to pay tax on the money, unless you are 100% sure
that IS the only option!
C. Not Every Institution is Qualified Either
in This Specialty Area of Practice!
may very well be best to leave the money with the current
institution that your deceased IRA owner had the money in.
But, if that institution your heir had his or her money in
is talking about the need to "distribute the money to you",
this means full income taxation! In that case, you most
likely need help in finding a new home! Stall them and
remind them you have until the end of the next year after
the death before you HAVE TO do something!
Also, if the current firm sells stocks and you like fixed
assets for safety sake, you may need a new home as well. And
the opposite may also be true of course. Too many times I
see an heir take over an account at a brokerage firm that
they inherited and never question what the money is invested
in. Many times, a change of portfolio structure is needed,
if not a full change in brokerage firm or other fiduciary
institution home that is now holding the inherited IRA funds
of the deceased. (Your broker should instantly offer a
new suitability review or form to you in your first meeting.
If not, find a new broker...)
And yes, you can move the money tax-free wherever you
want in almost every case, you just
can not take constructive receipt
of the funds when it comes to an inherited IRA! There are no
60 day roll-overs allowed in this case, such as you have with a
regular or traditional IRA account.
SINCE AN IRS APPROVED ENROLLED AGENT CONTRADICTED ME IN A
RECENT NATIONAL PUBLICATION INTERVIEW, I REPEAT: NO 60 DAY
(He obviously is no Inherited IRA
You can re-register
the account as an inherited IRA, maintaining the name of the
deceased owner on the account while you decide just where
you really want to keep the funds. Well, this is mostly
true. Lately, we have to "wrestle" with a few custodians to
force them, (help them?) pay the death claim while still
maintaining liquidity options so the money isn't tied up or
hit with surrender or sales charges if or when you want to
direct transfer it elsewhere.
Or, you can decide now -- the permanent home
of your new funds during the allowed time and then
make the "trustee to trustee" transfer required to keep the
funds tax deferred as new Inherited IRA accounts. Either way is fine as the first step.
Additional account management is of course required,
including determining when the mandatory RMD (required minimum distributions) must
begin in order to avoid penalty from the IRS.
A word of caution: If your deceased heir
was over age 701/2 and had not yet
received his or her required distributions in the year of death,
you really will need to consult with an Inherited IRA expert
or at least an accountant or CPA to
be able to get this matter taken care of before any possible
transfers are anticipated. The institution normally will
catch this detail, but keep watchful eyes on them to be sure
they DO Distribute the deceased heirs' RMD prior to your
trustee to trustee transfer request being given to them. Or,
if you leave the funds with them, before you re-title assets
with the same IRA custodian.
Basically, any institution that transfers your inherited
IRA without fully paying out 100% of the yearly RMD prior to the
transfer to the listed beneficiaries, causes problems upon
themselves and problems for you too as the new heir and owner
of the account. BE SURE YOU HAVE WRITTEN PROOF AND CHECK
THE MORTALITY TABLES BEFORE AUTHORIZING ANY TRANSFERS OUT!
(For multiple accounts, contrary to what you might be told,
the IRS doesn't care which account you pull RMD out of...as
long as you get 100% of the minimum out the year you inherited
And for any IRA owner required to distribute the RMD each
year, failing to take proper RMD's ON TIME has a big penalty!
That penalty is a whopping 50% of what you should have taken
out! So again, choosing the wrong trustee or custodian in this area is not only expensive, but also a huge
hassle if that money institution doesn't comply with strict
IRS reporting guidelines. Or fails to notify you of important
distribution options on time, before penalty situations
exist. A current client case with a
Metropolitan Life IRA proved their mistake in telling the
beneficiary he had 5 years to pull money out (not true if
over age 70.5). That situation could now cost him 50% of his missed RMD's,
since it was discovered 3 years after the death! (They
gave me an email saying nothing was reported to the IRS
In this area of work, don't assume anything! Improper training in many
institutions, especially small firms, can cause disastrous
results and put the money in Inherited IRA Hell
automatically before you even have a chance to object. Papers
can be put in front of you to sign. And, if wrong, they
guarantee your money is going into the Inherited IRA Hell
tax pit! Sadly, some of our biggest goofs equally come from name brand
firms, so the short list of "Inherited IRA Hell friendly"
custodians remains very, very short!
(Ask us and we will tell you)
In many cases, relying on the institution alone for your
tax advisory is not a good policy, and they will tell you up
front they can't give you legal or tax advisory. (THIS
IS A POINT YOU REALLY SHOULD WRITE DOWN!)
Remember, the institution
lawyers will include disclaimers in your account agreement
that inform you to get qualified legal or tax advice, if you
need it. (YOU MOST LIKELY DO) In other words, they will state they aren't in that business!
Don't ignore those disclaimers.
Plenty of inherent liability exists with any
institution who advertises or agrees to take over the
custodianship of ANY Inherited IRA account...so, they
can disclaim the liability all they want. By their
very act of receiving your funds and holding them -- they
share the risk and penalty for failing to follow IRS codes,
rules and general common contract law, just the same. Though
every custodial account will insert "hold harmless"
language, it isn't fool proof when MALPRACTICE develops.
Also, special problems may happen often on
all IRA's that require RMD , which are split between two or
more institutions. Multiple institutions as your money
Trustees have no way to communicate to get the RMD
calculations correct for you. (Privacy Act Laws apply)
Even though it doesn't matter
which account you draw your RMD from each year, you or someone you
trust for accounting purposes should figure the RMD for you
which is always going to be based on the closing values of
the prior account year. (December 31st values determine RMD)
All you need is the current IRS published tables that spell
out your life expectancy! Software is also available,
some for free online, that will give you these required figures.
If you engage my firm for paid professional services, I
will promise to give free RMD calculations for the life of
your retained account.
I do think that the size of the trustee should be very large
to assure you that they are doing plenty of Inherited IRA
account business and therefore are very experienced. And,
that normally means they have the best database software and
compliance software as well so "stupid" mistakes don't take
your money with a small firm could expose you to less than
stellar management and service practices. Any firm may
have good expertise on this subject, but give poor or slow service. The
right firm should be smart about this type of specialty
account and be known for great service as well!
And, of course, I think that the firm you choose, or firms in many cases
(you usually can split out and divide your
Inherited IRA without taxation, in case you were wondering)
should be highly rated by rating companies to assure you
that your money is safe. Safety of the firm always mattered.
After the financial crisis of 2008, it is paramount!
And, I think that the institution you choose should
openly tailor their services to handling
Inherited IRA accounts. That would constitute the minimum
requirements I would look for when or if you are now
shopping for a new home for your Inherited IRA account.
But, with that said, I have to tell you a story. About
years ago, I went with a brokerage firm that advertised
everything I just mentioned. They declared themselves the
experts when this area of practice was first born around
1998 and 1999 here in the U.S.
The end result is that a con man was discovered as the
head of the entire "Stretch IRA" department of the firm and
was instantly fired when the parent company found out!
(Guess who told them?) The
company could not administer the large amount of business I
placed with them to save their lives! In other words, they
were imposters! Legal remedy was sought and obtained in
private settlement for
clients who were hurt by their false advertising.
So, when you go shopping, be careful who you deal with
today...not everyone -- IS who they say they are! (or is an
"expert" just because they say they are).
you get the exact same advice from two unrelated advisers,
chances are much higher you are getting GREAT advice!