What to do if you inherit a spouse’s IRA

So you’ve inherited your spouse’s IRA. What you do now could have far-reaching tax implications. The one thing you cannot do is sit on your hands. Why? Because if you fail to withdraw at least the required minimum amount from your inherited IRA, you will be charged a penalty equal to 50% of the shortfall. This is one of the toughest penalties in our beloved Internal Revenue Code. So please pay attention and read on to learn how to calculate required minimum withdrawals from an IRA you inherited from your spouse.

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Longer Life Expectancy: A Challenge for Retirement Advice

BankInvestmentConsultant article by Charles Paikert

Increasing life expectancies and better health among seniors will change how retirement planners advice older clients, BankInvestmentConsultant writes.

Living Longer and Betterretirement planning

People are living longer: the oldest person is 116 years old, and the U.S. now has 70,000 people over 100 — twice as many as 20 years ago, according to U.S. Census Bureau data cited by the publication. By 2050, the number of Americans over 65 is projected to reach 84 million, almost double what it was in 2012, according to census data cited by BankInvestmentConsultant.

What’s more, advances in medical technology such as organ replacement and prosthetics are changing not only how long people live, but what they do in their old age, BankInvestmentConsultant writes.

Considering the Costs

All these factors will make it more difficult for financial planners to properly advise their clients, according to the publication.

For some, such as Steven Podnos, principal of Wealth Care in Cocoa Beach, Fla., the answer to increasing longevity is to tell clients to keep working longer, BankInvestmentConsultant writes. Others encourage clients to wait until turning 70 to claim Social Security benefits, according to the publication.

Work past retirement age doesn’t have to be full-time, but there’s “no reason they can’t work until their 70s,” Podnos tells the publication. Many are doing just that: 225 of the American workforce is over 55, according to Bureau of Labor Statistics data cited by BankInvestmentConsultant.

Employers are also realizing that older workers can be a boon rather than a liability, according to the publication.

Virtual reality can make employment for people over 50 even easier: physical constraints will no longer play as big a role when someone can work remotely, Jeremy Bailenson, founding director of Stanford University’s Virtual Human Interaction Lab, tells BankInvestmentConsultant.

Not Just About the Money

Ellen Siegel, an advisor based in Miami, says where and how her clients live is key to ensure a comfortable retirement, particularly for those considering continuing-care communities, the publication writes. Geographical location is often another issue, she tells BankInvestmentConsultant.

To cope with expenses, some advisors recommend that client take out reverse mortgages, according to the publication. Annuities and long-term care insurance, while controversial, should also be considered, advisors tell BankInvestmentConsultant. Long-term care insurance should also not be overlooked, they say. What’s more, new products, such as hybrid insurance and annuity products, are constantly coming to the market and advisors should keep abreast of them, BankInvestmentConsultant writes.

Many advisors also focus on areas of senior living outside of work and home, such as staying active through volunteering, BankInvestmentConsultant writes. Siegel advises older clients to retain a life coach to help steer them, according to the publication.

Source: BankInvestmentConsultant


Can an IRA Go Into an Irrevocable Trust?

By , Contributor

Setting up a trust as an IRA beneficiary has advantages and potential pitfalls.

The primary purpose of IRAs is to provide for the retirement needs of the original owner. However, IRAs have also become a useful tool in estate planning, and many IRA owners look for ways to protect their assets for future generations.

Naming an irrevocable trust as a beneficiary of an IRA can provide that protection, but if you don’t structure the trust correctly, it can come at a high cost.


Don’t Be a Victim of These Costly IRA Myths

Time Money article by Don Cloud    

Recently, a client came to me after her husband had died. She was 48 years old and was seeking guidance on how to handle her newly inherited assets.

Her husband left her an IRA of about $100,000. Knowing that she would need the money immediately, the woman initially planned to take a lump sum distribution of the IRA, thinking this was the best way to quickly access the funds in the account.

This is when I realized that the woman had a serious misunderstanding of her IRA options.

I often seem to encounter clients who are unsure about their IRA options. These retirement vehicles come with many complex laws and guidelines that account holders must follow in order to make the most out of their savings. From ever-changing tax laws to an endless list of distribution rules, IRAs can leave the savviest of investors frustrated and angry. Despite the amount of resources that are out there, I have found that investors are as confused as ever about their IRA options.

MYTH: If I am recently widowed and inherited an IRA, a lump sum distribution is the best way to get the money I need.

When the woman initially requested that she take a lump sum distribution on her husband’s account, I brought to her attention the consequences of such a decision. She would not only pay taxes on the total amount, but she would also face an early withdrawal penalty because she was not yet 59½ years old. Since she would need the money to help pay for her and her family’s expenses, I suggested she keep the asset as an inherited IRA. The client was hesitant at first. She wanted to consolidate her accounts. An inherited IRA, she believed, was the same thing as an IRA. She told me she felt there was no benefit to leaving the account alone.

I responded that in fact there was a benefit. Maintaining an inherited IRA would allow her to take distributions from the account and avoid the large tax hit of taking a lump sum and penalties associated with early withdrawals. She could pay her bills while avoiding the wrath of Uncle Sam.

I also let her know that once she turned 59½, she could then take advantage of a spousal rollover. By moving the funds into her own name, the required minimum distribution would no longer be calculated based on the birthdate of her husband, who was older than her, but instead on her own. That would let her enjoy the benefits of tax-deferred growth in the IRA for longer than if she had left it as an inherited IRA. At this point, the woman was much more open to my suggestions.

MYTH: My will ensures that my IRA is distributed correctly.

About five years ago, I sat down with a married couple who had recently signed on as clients. As I looked into their assets and accounts, I recognized a major red flag. It wasn’t in their distribution plans, but rather their beneficiary forms.

Through the years, I have found that many investors believe their will is going to take care of everything. They think that if they state their intentions in their will, they will only complicate the situation by designating a person as an IRA beneficiary. The husband had named their estate as the primary beneficiary to his IRA.

He hadn’t understood the implications of his decision. Leaving an IRA to an estate instead of a person can create a significantly more complicated and expensive tax bill, as well as the costs and delays of going through probate. By naming his wife as the primary beneficiary, not only could they avoid that tax bill and probate process, but the wife could eventually take advantage of a spousal rollover as well. Because the couple also had children, I let the husband know he could take his planning one step further and name his children as contingent beneficiaries to the account. I explained that this would help reduce some of the wife’s planning later in life, while also setting the children up to take advantage of a stretch IRA.

This April, the husband died, and I learned the results of my advice. The wife informed me that their family saved roughly $80,000 in income tax. They also sidestepped additional costs by avoiding probate. The woman thanked me for my brutal honesty.

In our technologically advanced world, there is an endless supply of financial advice at our fingertips, and it can be hard to distinguish what information is accurate and what strategies are truly in your best interest. Ultimately, it’s my job as a financial advisor to help clear these misconceptions and set my clients on the right path toward retirement success.

– Don Cloud is president and founder of Cloud Financial, an independent financial advisory firm with offices in Huntsville, Florence, and Gadsden, Alabama.

Source:   time.com/money


IRA distribution rules every retiree should know

Dan Caplinger, The Motley Fool

It takes most people their entire career to save up enough money to retire comfortably by using IRAs and other retirement accounts to help them make the most of their investments. Yet when it comes time to take money out of an IRA, failing to follow the rules can be a costly mistake. With that in mind, let’s take a look at the IRA distribution rules that most often trip up people and how you can make sure you follow them correctly.

When you can take money out of an IRA

The best-known rule about IRAs is that if you take money out too early, you’ll pay a penalty. The magic age for penalty-free IRA withdrawals is 59 1/2, but if you take withdrawals before that, you’ll have to cover a 10% IRS penalty on top of any tax liability you owe from any traditional IRA withdrawal that gets added to your taxable income for the year.

Note that there are a number of exceptions to the 59 1/2 rule that you can use to avoid the 10% penalty. Specifically, up to $10,000 of withdrawals you make to pay for a first-time home purchase, qualified educational expenses for yourself or your family, health insurance if you’re unemployed, and un-reimbursed medical expenses in some cases can avoid the 10% penalty. In addition, beginning a program of substantially equal periodic payments, or SEPP, also gives you penalty-free access to IRA money before reaching 59 1/2. But keep in mind that SEPP plans last a minimum of five years with no provisions for penalty-free cancellation of the program.

There’s also a tricky rule with Roth IRAs. Most of the time, distributions from Roth IRAs are tax-free. But even if you’ve turned 59 1/2, you might owe tax on a Roth distribution if you’ve had a Roth for less than five years. Even if that applies, though, the tax only affects incomegenerated from the Roth, leaving the original investment untouched.

When you must take money out of an IRA

Many retirees prefer to live off other sources of income, such as Social Security and employer pensions. As a result, they’ll leave IRAs untouched for as long as possible. For traditional IRAs, though, there’s only so long you can go without taking IRA distributions. The IRS requires minimum distributions, or RMDs, beginning at age 70 1/2.

To figure out how much you have to withdraw, you take your IRA balance as of the end of the previous year. You then divide the balance by a life-expectancy number from an IRS chart. The answer gives you the amount of your RMD for the year. If you don’t withdraw at least that amount, you’ll owe a 50% penalty on what you should have withdrawn. That makes it important to get started as soon as you’re required to.

Roth IRAs have no RMD provisions, however. That means you can leave Roth IRA money in your account as long as you want throughout your lifetime.

When your heirs must take IRA distributions

After your death, a new set of IRA distribution rules applies to your retirement account.

Generally, anyone who inherits IRAs have a couple of choices. First, they can extend IRA withdrawals over their life expectancy, with required minimum distributions of their own kicking in immediately. Alternatively, they can take a lump-sum payment, or, in some cases, they can take distributions over a five-year period. Each of these provisions is designed to ensure that the IRA doesn’t go on forever, although life-expectancy-based payouts can keep a retirement account going for decades beyond your death.

If you’re married, your surviving spouse has two options: either roll over your IRA into the spouse’s own IRA, or to follow the same rules that apply to non-spouse IRA beneficiaries.

One thing to remember is that if the original IRA owner died before taking out the required minimum distribution for the year, the heir will immediately need to take out the RMD amount. Failing to do so causes the same 50% penalty that applies during the IRA owner’s lifetime.

After spending so much time and effort saving for retirement, the last thing you want to do is to make mistakes when you withdraw your hard-earned money from an IRA. By knowing the IRA distribution rules, you can make sure that as much of your savings as possible goes toward what you want.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.


How Much is Too Much to Leave Your Kids?

Article by Pamela Yip

Imagine that you’re a self-made person with $100 million in assets.

Do you leave it all to your children?

A coming inter-generational shift in wealth raises many issues for rich families, including how much to give children without doing more harm than good.

Financial advisers say the affluent families they deal with are most concerned with ensuring that their wealth doesn’t snuff out their children’s sense of purpose, ambition and desire to make the world a better place.

“Being a child of wealth shouldn’t be a burden,” said Robert Johnson, regional managing director at the Private Banking & Investment Group of Merrill Lynch in Dallas, “but sometimes it is.”

In a national study of 206 affluent parents in October, Merrill Lynch found that most people plan to leave the lion’s share of their wealth to family members, motivated by a desire to positively influence the lives of loved ones.

Given the amount of wealth that’s expected to be transferred to the next generation, more families will need to be discussing this.

“While the ‘Great Transfer’ (of wealth) from the Greatest Generation to the baby boomers is still taking place, a second and even larger wealth transfer from the boomers to their heirs is starting now and will continue over the next 30 to 40 years,” consulting firm Accenture said in a 2012 report.

“While the Great Transfer will see an over-$12 trillion shift, the ‘Greater’ wealth transfer is much larger, estimated at over $30 trillion in financial and nonfinancial assets in North America,” Accenture said.

So how much is too much to give your child?

There’s no magic number, but Merrill Lynch draws the line at “when the money creates a disincentive to achieve one’s full potential.”

“Too often, people think only about dollar amounts, not impact, when deciding how much is too much to give,” said Michael Liersch at Merrill Lynch Wealth Management. “There is no silver-bullet answer or one-size-fits-all approach to gifting assets. The process of meaningful, intentional giving, whether to family, friends or philanthropy, should be highly personalized. It requires honesty, humility and a willingness to face this all-important topic head-on.”

Bankers who work with the wealthy said they try to help families more clearly define what they want to pass on to their children.

“The first step in that is to really look at the overarching question of what do you want your legacy to be,” said Pete Chilian, managing director of the J.P. Morgan Private Bank in Dallas. “Perhaps the most challenging part in that is how much to give away during your life.”

Many wealth advisers also offer programs for young heirs on financial stewardship and money management.

“Even though some of them don’t have an aptitude or an inclination to learn about money management, it’s still important that they’re financially literate before finding themselves with a significant amount of wealth,” Chilian said.

Many families will form a foundation and have their children serve on the board so they can get their philanthropic feet wet, Johnson said.

“The thing that high-net-worth people worry about is that the money ruins children instead of enriching their lives,” he said.

That’s something that all of us want for our children, no matter how much money we will pass to them — for them to grow up to be productive, self-sufficient individuals wanting to better society.

Source:  postbulletin.com


New Math for Retirees and the 4% Withdrawal Rule

NYT article by Tara Siegel Bernard

More than two decades ago, Bill Bengen, then a financial planner in Southern California, said he had several anxious clients with the same question: How much can I spend in retirement without running out of money?

Being relatively new to the profession, he dived back into his finance textbooks for answers, but said he couldn’t find any guidelines rooted in facts. “I decided to get down to business with my computer,” said Mr. Bengen, 67, who retired in 2013 and now lives with his wife in La Quinta, a resort town in California’s Coachella Valley.

What he and his computer produced, in 1994, became part of the financial vernacular and is still the most widely referenced rule of thumb. Known as the 4 percent rule, it found that retirees who withdrew 4 percent of their initial retirement portfolio balance, and then adjusted that dollar amount for inflation each year thereafter, would have created a paycheck that lasted for 30 years.

The concept has been both celebrated and criticized, and it has recently come under scrutiny yet again, particularly as the current crop of retirees are entering retirement during a period of historically low interest rates. But the question of how much they can safely spend each year may be more important than ever: Roughly 11,000 people, on average, are expected to turn 65 every day for the next 15 years, according to the Social Security Administration.

“I always warned people that the 4 percent rule is not a law of nature like Newton’s laws of motion,” said Mr. Bengen, who graduated from the Massachusetts Institute of Technology with a bachelor’s in aeronautics and astronautics in 1969. “It is entirely possible that at some time in the future there could be a worse case.”

Mr. Bengen’s original analysis assumed the retirees’ portfolio was evenly split between stocks and bonds, and he tested whether the paycheck could persevere through every 30-year period dating from 1926. It succeeded.

The big question now — difficult even for an aerospace engineer to answer — is whether a new worst case is beginning to play out, given the painfully low interest rate environment, which yields little for safer bond investments, where retirees often hold a big portion of their money.

“Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases,” said Wade Pfau, a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.

Since Mr. Bengen’s original paper was published, the 4 percent concept has been replicated, expanded, criticized and even refined by Mr. Bengen himself. (By using a more diversified portfolio, he later raised the rate to 4.5 percent.)

Critics of the rule point out that it is based on conditions in the United States during a very specific time in history; it also doesn’t take into account items like investments costs, taxes, different time horizons or the reality that most retirees don’t spend their money in a linear fashion. Some people may want to spend more early in retirement and may be willing, even comfortable, making cuts when the market plunges once again. And if retirees want to leave money to their children, they may need to trim their spending further.

Sorting all of this out, particularly without a cushy pension to fall back on, is a complicated task, even for a numbers-savvy retiree. Still, the original 4 percent rule persists as a starting point, and some retirement experts are still comfortable suggesting similar withdrawal rates, with some caveats and new twists of their own.

In a recent analysis, Mr. Pfau compared several withdrawal strategies in an attempt to illustrate how spending patterns might change to guarantee that a portfolio will last for 30 years, even if low rates persist or retires face some other awful combination of events.

He found that people who spend a constant amount adjusted for inflation — similar to the 4 percent rule — would have to reduce that rate to 2.85 to 3 percent if they wanted assurance that their spending would never have to dip below 1.5 percent of their initial portfolio (in inflation-adjusted terms).

So a retiree with $1 million could securely spend nearly $30,000 annually for 30 years, in the best and worst of market conditions. The big drawback, though, is that if economic conditions are generally average, retirees would be left with $794,000 in unspent money. If they were unlucky and experienced terrible market conditions, they would be left with $17,900.

That’s the trouble with this strategy. “Most of the time, you underspend,” said Mr. Pfau, who is also a principal at McLean Asset Management. “Yet you still run the risk of running out.”

Other retirement experts, including Michael Kitces, director of research at the Pinnacle Advisory Group, are still comfortable recommending early withdrawal rates of about 4 percent. He has likened the current environment — low interest rates and high stock market valuations — to walking along a cliff. Today’s retirees are walking along the edge, which, he said in his blog, required more caution and continuous monitoring. But that doesn’t mean they’re going to fall off.

Mr. Pfau isn’t so sure. So his recent study looked at different strategies beyond the 4 percent rule, some of which allow people to spend a bit more early on, but also provided assurances that spending wouldn’t dip below a certain level for 30 years. At least one approach that he analyzed, using a portfolio evenly split between stocks and bonds, was initially created by Jonathan Guyton, a financial planner with Cornerstone Wealth Advisors in Edina, Minn., and allows an initial withdrawal rate that approaches 5 percent.

To start that high, however, you need to follow a complicated set of rules: Normally, annual withdrawal amounts can increase by last year’s rate of inflation. And in good years, retirees can generally increase withdrawals by 10 percent.

But no increase is permitted in years when the portfolio loses money. In fact, a small spending cut might be necessary in that case: When balances drop below certain levels — causing your withdrawal rate to rise more than 20 percent above the initial rate, say to 6.4 percent from 5.3 percent — the next year’s withdrawal must be cut by 10 percent.

Tricky rules of that sort are likely to leave retirees scratching their heads. It’s hard envisioning even the sharpest of aging retirees, much less the most vulnerable, following this sort of discipline on their own.

So perhaps it’s not all that surprising that Mr. Bengen said he had hired not one, but two financial advisers — both good friends — to handle his retirement money. Though his advisers rely on financial software, he said they were proponents of the 4 percent rule.

“And my actual numbers probably come close to that,” said Mr. Bengen, who spends his days honing his creative writing, playing the guitar, setting up bridge and boating clubs and taking time to visit his 20-month-old grandson. “I have followed my own advice.”

But if he had advice to offer others, it is this: “Go to a qualified adviser and sit down and pay for that,” he said. “You are planning for a long period of time. If you make an error early in the process, you may not recover. ”

Source:   nytimes.com


The Executor’s $1.2 Million Mistake

Forbes article by Ashlea Ebeling

Here’s a tale of caution about being an executor, the person you appoint in a will to oversee your estate after your death.

The cast includes a 73-year-old high-school-educated homemaker named executor of a nonagenarian cousin’s will, an attorney who was battling brain cancer, seven distant relatives and three charities all due a piece of a $12.5 million estate, and an Internal Revenue Service bill for $1.2 million in penalties and interest for failure to file an estate tax return and pay taxes on time levied on the estate.

In an appeal to the U.S. Court of Appeals for the Sixth Circuit filed in February, the executor is trying to recover the $1.2 million. The question at hand: was her failure to file the return and pay the tax on time due to reasonable cause and not willful neglect?

The details might make you think twice about who you appoint as executor of your will—or whether you agree to take on the role for a friend or relative. “What’s the lesson? Even if you have an expert, you have to pay attention to the matters at hand,” says Jon Hoffheimer, a lawyer who the court appointed to administer the estate as a co-fiduciary with the executor, Janice Specht, after it became clear that she wasn’t up to the task. (He’s a co-appellant.)

In practice, most people appoint family members or friends as executor, and they hire an estate lawyer to do the work, such as making prompt tax and probate filings. But it’s the executor who bears the ultimate responsibility to make sure it’s done—on time.

The deceased, Virginia Escher, a 92-year-old widow of a UPS worker, lived a simple middle class lifestyle in Cincinnati, Ohio despite having a small fortune, the bulk of which was in UPS stock. “They were hardworking people; they never spent a nickel,” says Vincent Salinas, a lawyer who represented the estate.

Escher appointed her cousin, Specht, as executor, six months before her death in a simple three-page will drawn up by an estate lawyer, Mary Backsman. When Escher died, Specht returned to Backsman, who indicated that she would take care of everything. Specht, then 73, had never served as an executor (even when her husband died), held no stock and had never been in an attorney’s office.

Backsman, a lawyer with 50 years of experience, was privately struggling with brain cancer and failed to follow through on the work. Meanwhile, Specht got probate notices that deadlines were being missed, even a warning call from another family about Backsman. When Specht questioned Backsman, Backsman assured Specht that she had filed for an extension. (The deadline to file an estate tax return and pay tax is nine months after death; extensions are granted routinely.)

A year after the return and tax were due, Specht fired Backsman and hired Salinas who got the estate work done in a couple of months. But that was just a piece of the saga. A push by distant relatives to remove Specht as executor led to the appointment of Hoffheimer as co-fiduciary. Another fight was over how to allocate the tax liability. And the estate filed a malpractice action against Backsman and Specht that was settled out of court. That settlement allowed Specht to pursue a refund of the penalties and interest imposed by the IRS in U.S. District Court.

The District Court judge ruled against Specht, seemingly reluctantly, noting that “the factual circumstances are both complex and sad,” and stating that reliance on counsel cannot constitute reasonable cause for the late filing and payment of taxes. Interestingly, he noted that the state of Ohio—which imposes its own state estate tax—refunded the late filing and payment penalties for Ohio estate taxes without the estate filing a refund suit. (Ohio is one of 19 states and the District of Columbia that impose a state level death tax.)

Specht and her lawyers aren’t commenting because of the pending appeal. However, their position is clear from their opposition to the motion to dismiss the case at the district court level. The U.S. Supreme Court, in U.S. v. Boyle, drew a bright line rule for tax refunds, placing the burden of compliance on individual fiduciaries (executors and trustees), and a hostile body of tax refund case law followed. But “Boyle has never been applied to a set of facts as extreme or unique as these, and should not be,” Specht’s lawyers argue. “Mrs. Specht’s complete (and completely understandable) trust and total unfamiliarity with the process, when combined with Ms. Backsman’s concealment and misfeasance, caused the late filing and payment of estate taxes.”

So what if you’re an executor? The will spells out your basic duties. Read it. In addition, Salinas says it’s his practice to prepare a list of duties—including tax filings and due dates—and have the executor sign it, acknowledging the responsibilities.

Source:  forbes.com


Congressman Introduces The Death Tax Repeal Act

Congressman Mac Thornberry filed his first bill of the 114th Congress on its opening day. The Death Tax Repeal Act (H.R. 173)” will completely and permanently repeal the Federal estate, gift, and generation-skipping taxes. The bill already has garnered 36 cosponsors.

“The death tax is fundamentally unfair for estates of any size,” said Thornberry. Americans are required to pay taxes on their savings and incomes while they are alive.  They should not have to do so at death as well, nor should their children and grandchildren have to bear these taxes.”

The death tax, also known as an inheritance tax or estate tax, goes against some of the values Americans cherish most. The American people should be able to work hard, build, and save knowing that these assets will one day be passed on to their children and grandchildren.  Particularly vulnerable to the death tax are small business owners, farmers, and ranchers who hope to pass personal business on to future generations but have to contend with a tax that may make that impossible.

“Generations of ranching families have worked tirelessly and sacrificed to build successful operations that help feed the nation,” said Joe Parker Jr., a local, third generation rancher and past Texas and Southwestern Cattle Raisers Association President. “Unfortunately, when it comes time to pass these hard-earned operations on to the next generation, if a rancher can’t afford to pay this tax, they lose their property and their way of life.

“Death should never be a taxable event. This is why I support Congressman Mac Thornberry’s “Death Tax Repeal Act,” which is critical to the future of the ranching industry,” Parker concluded.

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