(PUB) Investing 2015

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IRA Challenges and Inheritance Portfolio Matters | Christine Benz

does, of course, they will pay the tax—that’s not what we are talking about—but they will also pay a penalty, because once they do a rollover, it’s treated as if it was always their money, and they are subject to the 10% early withdrawal penalty. If they elect to stay as a beneficiary, there is no 10% penalty. If they need money before 59 1 / 2 , they can just take that money. They will pay the tax, but no 10% penalty. Then, at 59 1 / 2 , when the penalty period expires, he or she can do the rollover into their own IRA , and they don’t have to take required distributions until they turn 70 1 / 2 . Another important thing for any beneficiary, but espe- cially a spouse: As soon as you inherit, set up the right type of account. Again, if you are under 59 1 / 2 , an inherited account; 59 1 / 2 or over, a spousal roll- over. But immediately name new beneficiaries on your own IRA .

I sat down with IRA expert Ed Slott to discuss key challenges with IRA s and inheritance.

Benz: What do you do when you inherit an IRA ? And there are some important distinctions depending on your relationship to the deceased. Let’s start with the spouse beneficiary. Let’s talk about what options they confront when they inherit an IRA from their spouse. Slott : As an inheritor, I always start with two words, no matter who the inheritor of an IRA is. Two words: Touch nothing. Slott: That will save you a fortune. [Wait] until you are with somebody who knows how to set up IRA s, knows how to set up inherited IRA s, knows the differ- ence between beneficiaries. Again, you need some- body with specialized knowledge in this. I’ll give you an example. The average beneficiary, let’s say, is a son or a daughter and they’re not children, they are maybe in their 50 s already. The first thing they might do [is say,] “Oh, here is Mom’s $500 , 000 IRA —let’s take it out.” Well, that’s the end of that. The minute you touch an inherited IRA , it’s over. The minute it comes out, it’s taxable. And that is the number-one mistake, grabbing it too fast. It’s taxable, and there is no fix. That’s an irrevocable—or what I’d call fatal— error. So, first thing, take a breath. You can look at it on the statement, but don’t touch it. Now, to your question if the spouse is the beneficiary. If they are under 59 1 / 2 , they should maintain it as an inherited IRA —only a spouse has that option. The spouse can also do a rollover. Most people, including myself, will recommend the spousal rollover, but only if the spouse is 59 1 / 2 or older. If the spouse is younger than 59 1 / 2 , it’s more likely that the spouse may need to dip into that money. And if he or she Benz: So, go get some advice.

Benz: Why is that so important to make sure that you are naming those beneficiaries?

Slott: Number one, you direct where that money will go after you die, and [number two], preserve the stretch IRA for your chosen beneficiaries. Otherwise, if you don’t name beneficiaries, it may end up back in your estate, or it could be contested. Who knows where it might end up?

Benz: If your heirs are younger, they have the opportu- nity to stretch those distributions.

Slott: In certain cases. If you do a spousal rollover, then it’s yours. And you should name both primary and contingent beneficiaries. If they are named on the IRA beneficiary form, they can stretch. If you keep it as an inherited IRA , you still want to name benefi- ciaries. They would be, in that case, successor beneficiaries—in effect, the beneficiary’s beneficiary. Benz: Does it matter if the deceased had begun taking distributions and was required to take required minimum distributions from that IRA ?