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 advisor 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 advisor 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 advisors 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
-- 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
advisors 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 advisor. 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 advisor wrongly
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 advisor 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 1-800-782-2806
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 advisors 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
Advisors Are Still Asleep! Why Your Inherited IRA May Need
Guaranteed Income Planning!
In the past, advisors 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 advisors! 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.
10 Rules You Must Know
and Abide By
From M.D. Anderson,
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 independent of the firm just to be
sure you get the facts right before you begin. (and accept
their explanation of options and terms or sign any paperwork)
Rule # 2:
Register the New Account Properly
Note: 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
the firm. 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."
"Inherited IRA... "
"Beneficiary IRA... "
Truncated Sample: "IRA
FBO F. Jones (Ben.); of J. Jones (Dec.)"
Tip: Never let
the decedent's name be removed!
Rule # 3:
Transfer Your Inherited IRA to a More Beneficiary-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
elections under the new IRA agreement. Always move the
money via a trustee-to-trustee transfer.
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 these, not a good thing for you
because it moves you to the brink of my trademark
"Inherited IRA Hell" status I talk so much about! If
that is the case, some will even restrict your chance to
move the money elsewhere.
TIP: If you
discover funds taken in a lump sum from a frozen 401-k plan,
before your loved one died (and in the same year), check with my firm to
see if special IRS 10 year averaging applies on the
distribution you receive as well as special capital gains
tax rates for any pre 1974 contributions made. This option
may also apply to you as a beneficiary inheriting the IRA,
but specific checks must be performed to determine your
If 10 year averaging doesn't apply
or causes a higher tax bill to settle up with the IRS all in
one year (which is caused by a required 100% lump sum
may still be eligible for a 5 year payout to reduce the big
bite of taxes on a lump sum distribution. (applies only if
decedent died before reaching age 70.5) The facts of your
case must be known by a professional inherited IRA advisor
before options can be fully known that apply to YOUR
Rule # 4:
Excluding the Decedent's Name from the Registration does not
Necessarily Make the Amount Taxable
I already covered this, but
it is important to make it a rule as well. Contrary to
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 done 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
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 trouble
that has to be corrected to avoid the 10% penalty if you are
under 59 1/2 in age!
Rule # 6:
Super Stretch Your Inherited or Traditional 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, I suggest you use the IRS "life expectancy" payout if at all possible.
That payout option will let you stretch the distributions
from the inherited IRA account over your lifetime. And, in
some cases, the lifetime of your children and even your
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:
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 beneficiary's single life expectancy.
(A premature death of an IRA owner
would always be a safe bet - take the remaining life
expectancy - and don't let someone convince you that only 5
years are available to you for withdrawal.)
2. If the IRA owner dies on
or after the required beginning date, the beneficiary can
distribute the assets over the longer of the remaining life
expectancy of the decedent or the life expectancy of the
beneficiary under the IRS statutes. (Multiple
beneficiaries on the same account will trigger the life
expectancy to be used for all beneficiaries for the OLDEST
beneficiary and is not a preferred way to hold an inherited
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 has
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... And,
he isn't your tax man!!!
Rule # 10: Maintain
Proper Beneficiary Elections on Your Account
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 I discussed most
likely will not be possible. I will assume for this rule,
that they did name you properly as one of the beneficiaries,
or as the sole beneficiary.
Note: We can
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)
Just don't forget that
protection afforded -- ends the day some
you that cashing in your Inherited IRA and re-investing
what's left with them!
So, be sure to keep your
beneficiary elections current. And, remember the designated
beneficiaries listed on your IRA always supersede the
instructions of your will or trust. In other words, a
"beneficial asset" such as an IRA is more powerful
than a 10 page Last Will or a 50 page Revocable Living
Trust! And, it is only one page! That is why you should be
extra careful in filling it out properly or ask us for assistance!
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.
2. Depending on state
law, to keep the inheritance from being subject to your
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)