(PUB) Investing 2015

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17 Morningstar FundInvestor January 2015
Slott: Years ago, it used to. But now, it generally does
not, other than in a few situations. Again, it’s always
going to come back to being very careful about
naming the beneficiaries you want on the IRA benefi-
ciary form—not in your will. The beneficiary form
trumps the will. If you name beneficiaries on your
beneficiary form, and they are individuals like your
children or grandchildren, they can stretch the inher-
ited IRA over their lives regardless of when you, being
the IRA owner, died.
It wouldn’t matter if you died before or after 70 1/ 2.
The only time it matters if you died before or after
70 1/2 is if you’ve neglected to name beneficiaries.
So, you don’t have a designated beneficiary to the
account. And in that case, many times your estate
becomes the beneficiary by default. And the estate
is not a designated beneficiary, so the stretch would
be lost, and then special rules come into play
depending on when the IRA owner died, before or
after 70 1/2.
Benz: You noted that one of the key things you
should definitely think twice about is just taking the
money and running, because you trigger a big
tax hit there. What are the other options, apart from
taking an immediate distribution, that nonspouse
beneficiaries have?
Slott: Well, there is a trap even if you don’t think
you’re taking an immediate distribution. Again, two
words: Touch nothing. Let’s say you’re the child
who inherited and [you] say, “Well, I want to invest
it the way I want to invest it. My dad was too
conservative. I’m going to move it from his IRA to my
inherited IRA , and I’ll do investing in a different
place. I didn’t like where we had the money.”
Here is a situation where they don’t want to take all
the money out; they just want to invest it differently.
But once they take the money out, that’s the trap. It’s
exposed. It’s over. It can’t be fixed; the whole thing
is taxable.
You can still move it to the investment of your choice,
but it can only be moved as a direct transfer—also
called a trustee-to-trustee transfer, where you never
touch the money. If you take a check out of that IRA—
your dad’s IRA —it’s over. It’s taxable. It’s like an
egg shell: If you break it, it’s over. The only way money
can be moved is a direct transfer without you
touching the money. That’s so important. If you touch
the money, there is no more inherited IRA. It’s all
taxable, and there is no fix for that.
Benz: Is it important to set up an inherited IRA that’s
separate from other IRA assets that I might have?
Slott: It has to be a properly titled inherited IRA ,
which means the name of the deceased IRA owner
must remain in the account title. So, it would read
something like “John Smith IRA, deceased, date of
death, FBO”—which stands for ‘for the benefit of’—
”John Smith Jr.” That’s a properly titled inherited IRA.
That cannot be commingled with an inheritor’s own
IRA. You do that, it’s over. There are so many rules in
the inherited area where you can have a fatal error.
When I say it’s over, it means the entire inherited IRA
becomes taxable, and it all gets added to your
income in one tax year.
Benz: Assuming I’ve set up that inherited IRA
separately and I’m a nonspouse beneficiary,
what are my distribution options for that account
after I’ve gone and done that?
Slott: Then, you can stretch or extend distributions
over your own life expectancy, which can be fantastic.
Obviously, the younger you are, the better it is. For
example, if you inherit it at, say, 30 years old, you can
stretch it over 53.3 years. You can take minimum
distributions over the rest of your life expectancy. It
doesn’t matter what kind of health you are in or
whether you think you are going to live long or short.
But you have the ability, if you set everything up
right, to stretch it over your lifetime or take more if
you want to. The amount you have to take is simply
the minimum. œ
Contact Christine Benz at