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| Inherited IRAs--Who Gets What? |
| by
Helen Modly
| 09-04-08 |
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Inherited IRAs are so complex that beneficiaries acting without guidance are almost guaranteed to make mistakes. To make matters worse, the institutions involved are all over the board in terms of what processes they will allow for these accounts.
In three decades, Americans have accumulated more than $9 trillion (think 12 zeros!) in various types of IRA accounts. As we begin to see the first wave of original owners pass on, these accounts are becoming a significant part of the enormous generational asset transfer from the greatest generation to the baby boomers. New rules that became effective only this year are adding to the obstacles that beneficiaries, and their advisors, must navigate to preserve this wealth.
The Stretch Can Make Them Rich
A 40-year-old client who inherits a $1 million IRA from a parent can stretch the required distributions over 42 years. With a modest 6% return over the years, her withdrawals will equal more than $3 million. While new rules make stretching IRAs available to more types of beneficiaries than ever, there are many quirks to these rules. So, where do you begin when the IRA owner dies?
First, Consider the Status of the Owner
Did the owner reach their Required Beginning Date (RBD) on or prior to the date of death? The RMD is April 1, of the year following the year they reached age 70 ½. If yes, then a Required Minimum Distribution is due for the year of death. The distribution will go to the beneficiary(s), but will be calculated on the deceased owner's age at death. The estate does not take this distribution, unless the estate is the beneficiary. This distribution must be made prior to December 31 of the year following the year of death.
Next, Consider the Status of the Beneficiary(s)
Beneficiaries are either Designated or Non-Designated. Beneficiaries can be named in many different ways, some of them not so obvious.
* They may be named on a beneficiary form.
* They may be selected by default within a custodial agreement when there is no named beneficiary.
* They may be selected when a primary beneficiary disclaims their interest.
* They may be otherwise identifiable, such as the beneficiaries of a trust.
In order to be a designated beneficiary, they must be a living, breathing, natural person or a group of natural persons, or a qualifying trust for the benefit of identifiable natural persons. They do not have to be identified by name, although this is usually a good idea. "All children of this marriage to share equally" will suffice to make each child a designated beneficiary.
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Helen Modly, CFP, ChFC, is executive vice president and director of investment services for Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 20 years of experience providing wealth-management services. She is a member of NAPFA and FPA. She can be reached at info@focus-wealth.com.
The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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