CLICK HERE TO READ Mike's UPDATE ON A POTENTIAL GOVERNMENT TAKEOVER OF YOUR 401-K OR IRA ACCOUNTS!

Hi! I want to personally welcome you back to this extremely important emerging field of personal finance that has for the most part, been ignored until recently. With the record death rates of the "Greatest Generation" hitting all time highs, it is especially sad to me as an advisor to have to see so many of my own senior clients pass on.

The best way you can honor them when an inheritance is left to you is to be diligent and wise on how you treat the money they leave you. Just like they did for all those years they lived! I am dedicated to helping you do that.  It starts with giving you the important information you requested. No tricks or obligations like other websites that never deliver what they promise.

Just remember that this information has to remain general in nature as each specific case my firm takes under a "client" relationship has twists and turns that can not be known until all the facts are discovered.  Once the facts are known, one can just follow procedures with paperwork submission and follow up to transact a successful inherited IRA transfer.

Those receiving an Inherited IRA account who want professional guidance, can employ my services if you don't feel 100% sure you can do this completely on your own. I follow a proprietary grid of options and procedures that go into much more detail to be sure nothing goes wrong with the death benefit payment and the registration of your new Inherited IRA account.  My  service will give you a  written procedural steps guide with a check off system as each step is performed. 

Or, you can try to do it yourself and if that is the case, I am sure the information you find on this "inside" part of my website will help you in general terms.  You can always bring us in if it becomes too difficult...

Lastly, if you like the quality and depth of the concepts you are about to read and desire my professional services, feel free to follow the contact information at the end of this website. Or, if you have a quick question, please feel free to ask me by phone 1-800-782-2806 or Email as well. You will not be billed for it -- I promise!!!

Sincerely,

M.D. Anderson, President
Financial Strategies, Inc.

Notes Before You Begin:

1. No matter what kind of golden egg, you have qualified assets in right now, sooner or later they will become an IRA before you die. (If not originally an IRA) In case you were wondering, most IRS publications refer to the required minimum distributions as "RMD" and most non IRS sources refer to it as "MRD" or minimum required distributions.  I  went with the IRS version most common on this website, but please understand they both are acronyms for the same minimum money withdrawal action you must start and take out after you reach age 70 1/2 .

2. Also, you are going to learn more here than most books that will just confuse you.  The inherited IRA field is the most complicated area of financial advisory so I have purposely tried to write in a format that will "spoon feed" you so you don't choke on the complicated subject matter you are about to read.  For some, you will notice the redundancy and I apologize for it.  It is intended for you to learn and "know" what you are doing if you try to do this on your own.  And, some will get confused just the same, but I must say, it doesn't get much simpler than what you are about to read. If you don't understand the content fully, let me be the first to say you should seek an outside (not associated with the deceased) advisor to help you! Obviously, I hope you choose me!

3. Sometimes, an additional inherited IRA advisor must be brought in for legal or tax issues that are beyond the scope of my advisory services. My firm is acknowledge and well respected in this field of professional advisory. I personally promise I will always inform you when a referral is required. FSI has made numerous referrals to other "IRA Experts" over a long history of operation, including to recently working together on a client case with staff from popular Roth expert and author, James Lange, CPA/J.D.  It is a normal part of my practice when special circumstances warrant it. 

If you ever get your physical hands on the money*, you have just entered Inherited IRA hell!

By now, you most likely have figured it out. There are two types of IRA money advisors. Those that get it right. And, those who don't.

The first will keep you out of Inherited IRA hell. The latter has or will put you in there. Once there, your options are limited to taking legal action for any chance of financial recovery. The only tax write off is your state income taxes you paid on the taxable distribution, if you itemize on your IRS 1040!

It is a hard fact that the IRS and your state tax authority will not give back your money. And the institution that aided and abetted the mandatory taxation of the inherited IRA will not and can not reinstate the account after the fact. Once the check is cashed. It is set in stone! (many ask this question of us IRA experts, knowing pretty well what the answer is!)

Now, occasionally, a firm may register your new inherited IRA and forget to include the name of the deceased IRA owner who left your share to you.  These situations have been modified by the firm in those cases and most likely, the IRS is never aware of the mistake.  (if they did, they might argue you had taken "constructive receipt" and want to tax the funds)  So, I personally recommend you have an expert read and review the paperwork before you sign it if you try to do this alone for that reason.

In cases of constructive receipt, regardless of how it happened -- you could try to file and hope for a favorable IRS "private letter ruling", but the truth is that the IRS is not in the business of feeling sorry for stupid mistakes made by administration departments of financial institutions and their employees or staff. Or by you!

When an IRA is payable to a trust, there may be room for a PLR from the IRS, but again circumstances need to stand between simple administration mistakes and arguable grounds in special cases that contain extenuating circumstances.

* Otherwise known by the IRS as "constructive receipt"

Your current financial advisor might be worried right now if you ask him or her straight out --  how to avoid paying any upfront income tax on your inherited IRA account. They are worried because most don't really specialize in this area and therefore are prone to tell you it would be best to just pay the taxes on the money.

This kind of treatment is disastrous to that money tree concept that has already been discussed. And, it is malpractice and any smart lawyer will be testing the limits of the advisor's E&O liability coverage if it is later discovered by the client that there were more options than what was offered to you.

I'm not speaking in theory but in actual practice. In fact, a few years ago one of my clients was told by a Phoenix financial planner that his deceased father's large IRA account  had just one option -- the heirs would have to pay the tax and then reinvest what was left with him. Now, this case did involve a trust as the beneficiary, so it was a complicated matter.

But, my firm did the research and found the needed tax code elements in the fathers' trust to authorize account transfers according to the IRS rules. I helped find the way to conduct the tax free transfers and then assisted in the "drop down" re-titling to the trust beneficiaries under "look through" provisions in the code. When it was all done, I performed a "drop down" on the accounts which allowed us to fully close the living trust altogether!

Sure, it was extremely complicated. And that is the very reason you should do full research before you authorize anything! At the very least, you have until December 31st of the year after the death, as long as you don't do anything quickly with the original account your loved one had his or her IRA in!

Can you imagine the extra earnings and principal growth for about 40 years on the instant $120,000+ I saved the client case I mentioned? Especially when the current advisor had told them to give it away to the IRS and state of Arizona tax departments? Your case could be similar, so please don't dismiss the need for a second opinion lightly.

This story had an interesting and unusual ending. I had to call the advisor mentioned to get some details on the case up front and was verbally abused by him over the phone. He called me a "bean counter" and told me to stick to counting beans and said I should not try to tell people what to do with their money. He bolstered himself as an investment advisor professional and warned me that accountants like me should not butt in on his advisory services.

After the case was completed and the transfers and re-titling was done, I noticed a large ad in the Arizona Republic newspaper about two months later. The investment advisor was prominently promoting his merger with a CPA firm in Phoenix and introduced a brand new company! I didn't care to call for the details, but I can easily surmise that he got educated real quick in this case he lost control of and was never going to let it happen again!

In other words, if you are a qualified advisor lacking in the ability to interpret these complicated tax issues, why create liability in guessing? I welcome your referral and would be more than happy to work with you. And, if you can team up with a good CPA in your own home area, don't ignore the possibilities as well in doing so. Just don't tell your client who just inherited an IRA that they have no option other than to pay tax on the money, unless you are 100% sure that IS the only option!

It may very well be best to leave the money with the current institution that your deceased IRA owner had the money in. But, if that institution your heir had his or her money in is talking about the need to "distribute the money to you", this means full income taxation! In that case, you most likely need help in finding a new home! Stall them and remind them you have until the end of the next year after the death before you HAVE TO do something!

Also, if the current firm sells stocks and you like fixed assets for safety sake, you may need a new home as well. And the opposite may also be true of course! Too many times I see an heir take over an account at a brokerage firm that they inherited and never question what the money is invested in. Many times, a change of portfolio structure is needed, if not a full change in brokerage firm or other fiduciary institution home that is now holding the inherited IRA funds of the deceased.

And yes, you can move the money tax-free wherever you want in almost every case, you just can not take constructive receipt of the funds when it comes to an inherited IRA! There are no roll-overs allowed in this case, such as you have with a regular or traditional IRA account. But, you can re-register the account as an inherited IRA, maintaining the name of the deceased owner on the account while you decide just where you really want to keep the funds.

Or, you can decide now the permanent home of your new funds during the allowed time and then make the "trustee to trustee" transfer required to keep the funds tax deferred. Either way is fine as the first step. Additional account management is of course required, including when the mandatory RMD (required minimum distributions) must begin in order to avoid penalty from the IRS.

A word of caution: If your deceased heir had not yet received his or her required distributions in the year of death, you really will need to consult with an accountant or CPA to be able to get this matter taken care of before any possible transfers are anticipated! The institution normally will catch this detail, but keep watchful eyes on them to be sure they DO Distribute the deceased heirs' RMD prior to your trustee to trustee transfer request being given to them. (When you have decided to change institution/trustee IRA homes) 

Basically, any institution that transfers your inherited IRA without fully paying out 100% of the yearly RMD prior to the transfer to the listed beneficiaries, causes problems upon themselves and problems for you too as the new heir and owner of the account.  BE SURE YOU HAVE WRITTEN PROOF AND CHECK THE MORTALITY TABLES BEFORE AUTHORIZING ANY TRANSFERS OUT!  (For multiple accounts, contrary to what you might be told, the IRS doesn't care which account you pull RMD out of...as long as you get 100% of the minimum out the year you inherited the account)

And for any IRA owner required to distribute the RMD each year, failing to take proper RMD's ON TIME has a big penalty! That penalty is a whopping 50% of what you should have taken out!  So again, choosing the wrong trustee or institution firm in this area is not only expensive, but also a huge hassle if that money institution doesn't comply with strict IRS reporting guidelines or fails to notify you of important distribution options on time.

Don't assume anything! Improper training in many institutions, especially small firms, can cause disastrous results and put the money in Inherited IRA Hell automatically before you even have a chance to object!

In many cases, relying on the institution alone for your tax advisory is not a good policy. Remember, the institution lawyers will include disclaimers in your account agreement that inform you to get qualified legal or tax advice, if you need it. In other words, they will state they aren't in that business! Don't ignore those disclaimers.

But, plenty of inherent liability exists with any institution who advertises or agrees to take over the custodianship of ANY Inherited IRA account...so, they can disclaim the liability all they want.  By their very act of receiving your funds and holding them -- they share the risk and penalty for failing to follow IRS codes, rules and general law, just the same.

Also, special problems may happen often on all IRA's that require RMD , which are split between two or more institutions. Multiple institutions as your money Trustees have no way to communicate to get the RMD calculations correct for you. (Privacy Act Laws apply)

Even though it doesn't matter which account you draw your RMD from each year, you or someone you trust for accounting purposes should figure the RMD for you which is always going to be based on the closing values of the prior account year. (December 31st values determine RMD) All you need is the current IRS published tables that spell out your life expectancy!  Software is also available, some for free, that will give you these required figures.

If you engage my firm for paid professional services, I will promise to give free RMD calculations for the life of the account! (Believe me, it isn't that hard to figure them)

I do think that the size of the trustee should be very large to assure you that they are doing plenty of Inherited IRA account business and therefore are very experienced. Placing your money with a small firm could expose you to less than stellar management and service practices.  A firm may have expertise but give poor or slow service.  The right firm should be smart about this type of specialty account and be known for great service as well!

And, of course, I think that the firm you choose, or firms in many cases (you usually can split out and divide your Inherited IRA without taxation, in case you were wondering) should be highly rated by rating companies to assure you that your money is safe. Safety of the firm always mattered. After the financial crisis of 2008, it is paramount!

And, I think that the institution you choose should openly tailor their services to handling Inherited IRA accounts. That would constitute the minimum requirements I would look for when or if you are now shopping for a new home for your Inherited IRA account.

But, with that said, I have to tell you a story. About 10 years ago, I went with a brokerage firm that advertised every thing I just mentioned. They declared themselves the experts when this area of practice was first born around 1998 and 1999 here in the U.S.

The end result is that a con man was discovered as the head of the entire "Stretch IRA" department of the firm and was instantly fired when the parent company found out! And, the company could not administer the large amount of business I placed with them to save their lives! In other words, they were imposters!

So, when you go shopping, be careful who you deal with today...not everyone is who they say they are! (or is as "expert" as they might think).

TIP: When you get the exact same advice from two unrelated advisors, chances are much higher you are getting GREAT advice!

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!

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) firm, proper management secrets can all but guarantee success!

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...

I want to take the high ground though and assume that your case is not yet terminal as far as you can tell and that you are just looking for all the truths, facts, rules and free information you can find on this complicated subject. You may even be feeling a great sense of relief already knowing you have found a credible source for advisory that is available to you if you need it now or in the future. There is real power in knowledge but also stress release as well knowing you can ask for help if you need it.

Now, it is time to review those concepts for proper Inherited IRA management:

CONCEPT # 1: Drawing Down Principal In The Early or Mid Years of the Account Would Be a Grave Mistake!

O.K., 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. Your inherited IRA withdrawals should only be pulled out too 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.

Warning:  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 Inherited IRA Hell -- be sure the deceased name is put back on!), you need to get that changed right away!

Now, the truth concept so important in the management of you new account:

DON'T EVER REDUCE THE PRINCIPAL YOU RECEIVED!

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.

And, if you are in the new indexed annuity contracts that have the potential to pay closer to stock market average gains with no chance of principal loss, try to pull out a little less than what the account earns each year so that the remaining interest adds to your principal so that the earning base can increase. Of course, if this type of account experiences a flat year where the index credits don't earn any interest, be sure to take only RMD that year to limit the loss of principal as much as possible. And again, delay taking any more than the RMD's for as many years as possible to again try and let the account capital grow in your annuity account as well.

Finally, if you are in equities or securities, or real estate (more on that subject is coming up), there is a big no-no you need to adhere to that does not apply to fixed IRA accounts. That is because fixed investments remove the risk of principal loss and put in guarantees on principal that just are not available in real estate, securities or other variable brokerage account type investments.

CONCEPT # 2: Make This No-No on a Securities Account and Watch Your Retirement Income Die Long Before You Do!

This 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 has already commenced for some advisors and their clients remain unaware too.  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.

But, 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 reminded too)

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?

THE 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 logical answer!

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).

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 Oklahoma, 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 website: 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!

Your 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 can not be 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 33 years! So, I DO understand the funding vehicle of "real estate" as a possible choice for your IRA.  

What I find in these promotions though is that the "real estate" funded IRA promoters pretty well ignore the tax issues. The biggest problem is that real estate is like a horse. You can enjoy it all you want, but when you are done using it -- someone still needs to feed and watch over it. You can't just drive away from it and ignore it. Real estate requires maintenance too, unless it is bare land. Property taxes must be paid. Up keep, repairs, general maintenance and possible utilities costs have to be paid. Unexpected expenses appear often with real estate.

All of those expenses require income. If you are unfortunate enough to miss a few months rent when renters change, or to sit for months in a long vacancy period, income needs to pay the bills becomes critical.

And an IRS rule prevents you from depositing "new" money for these expenses unless they are qualified deposits into the IRA for tax purposes. So, any big bills that might come due may require the trustee to sell the property in order to pay bills, if rental income declines or goes to zero for a long period of time! The puny annual contribution limit of $ 4,000 (more can be put in under "catch up" rules if you are age 50 or over) is not going to cover many expenses if the property loses all rental income for a long period of time. (Extra cash would normally be kept in reserve on these accounts, but even that could disappear after a 6 month vacancy period!)

That brings up the second problem with real estate inside an IRA account. Maybe the amount you paid for the rental property inside your real estate funded IRA has fallen from the original purchase price by $25,000 or even more! This can easily happen in the current market we are in. In fact, you could lose a bundle on lowered values such as what has happened recently.  Then on top of that, a forced liquidation by the IRA trustee would lose even more! And then on top of that, your accountant will tell you the loss is not deductible because the IRA has a zero "basis" computation!

Wow! No income capital loss write off! Ever!

Real estate is a fine investment in the right context. It has tax sheltering automatic does it not? So, why would any credible advisor tell you to stick your large IRA into a real estate funded trust?

I think the answer is two-fold. First, advisors may feel it is a good home for diversification purposes. And I would agree too if it wasn't for the lack of capital loss deductions. And for the restrictions for getting needed working capital into the account when things go wrong, thus causing a cascading capital loss potential scenario if the property is liquidated by the Trustee.

And of course, I don't like the idea of someone else being in charge and making decisions for me, which is not required in any real estate owned outright. Few real estate ventures work out very well when the owner is removed from the day to day management of the project...

Read more on Capital Preservation concepts at: www.PreserveMyCapital.com 

But the second reason they do this is more subtle. They go after this money because your IRA accounts (Traditional, Roth, Inherited, former 401-k, 403-b, SEP, or Keogh, etc.) are now the largest targets in your personal assets!

For most of us, our retirement funds now exceed the value of our home, which has become the second largest asset we own in the United States! As Willie Sutton, the infamous bank robber said each time he was asked why he robbed banks - they go after these dollars because..."that's where the money is!"

Now, you could follow a few links and easily find out that I sell fixed, conservative investments in top rated annuities. You could easily accuse me of just doing what everyone else is -- going after that 12.2 trillion dollars of qualified funds that will be transferring over the next 10-20 years between parents and their children and from retirements of baby boomers!

Well, you would be right!  For the portion of your new Inherited IRA that should be invested conservatively, I may also be your best choice to help you make the transfer and manage your fixed account using fixed annuities from top rated carriers.  I would like to save you from a variable investment industry that doesn't always report that the average long term return on your securities accounts is less than 3%!!!

For that reason, I think too many people take too much risk in their investments. Here in Arizona, I have seen the destruction over and over whenever tax clients come to me to deduct their tragic large real estate deal losses or securities losses on their income tax returns. A puny $3,000 a year is all you get to write off, which is quite insulting! (my firm can help you deduct more on a tax return by an investment gain/loss timing analysis)

And when you die, any loss not yet deducted goes with you to the grave! It evaporates! So, I can not deny I want a chance to help you with the management or even the investment side of your Inherited IRA account. No apology is needed for offering multiple services for my clients. Some do everything with me. Others, use me to fill in the gaps with their current advisors. A few just have a single financial service with me, such as their tax preparation.

As long as my work is honest and my approach is conservative, and my intelligence is superior over those financial advisors who don't really have a clue how to handle the more complicated issues such as an Inherited IRA -- who would you rather have helping you right now? Please give it some thought, O.K.?

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 benefits.

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? They 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 then their parents, who rarely would carry a credit card balance. (or some, 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" provision 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 for 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!

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.

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?

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)

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 eligibility.

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 distribution), you may still be eligible for a 5 year payout to reduce the big bite of taxes on a lump sum distribution. The facts of your case must be known by a professional inherited IRA advisor before options can be fully known that apply to YOUR situation.

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 Inherited IRA 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. 

Rule # 5:  Distributions from Inherited IRAs are not 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, I will just address your new Inherited IRA account here. Once you have your inherited IRA at a beneficiary-friendly custodian or trustee, I recommend that 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 grandchildren.

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.

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 IRA.)

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.  They could force you to take a distribution within one year of the original owner's death regardless of the calendar year that might be more advantageous to you under the IRS statues.

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.

To be sure you are informed on tax law regarding IRA's, you can find the rules about distributions in IRS Publication 590.

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!

Rule # 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.

Rule # 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!)

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. 

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.

Be sure to keep your beneficiaries 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 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 properly or ask us for assistance!

Special 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 creditors.

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 if you are an Arizona resident 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)

 IS ANYONE BENDING OVER BACKWARDS TO HELP YOU RIGHT NOW?

So who should you hire or consult with to avoid those simple mistakes that trigger instant taxation of your loved one's inherited IRA? Who can get it right so you don't get wronged?

Who is willing to bend over backwards to help you get what you want?

The hard part, is finding that someone special you can trust to assist you -- in time! And, hopefully, finding someone in your local area. The best starting place is to ask them if they have ever worked on large IRA cases in the past other than just doing spousal rollovers. And ask how successful they have been in helping their clients avoid needless income taxation on inherited IRAs. (Without the IRS questioning the work they did)

If you live in Arizona, or the surrounding states, my firm is available for personal consultations. Or, you can hire me long distance as well for advisory, once a small starting advisory retainer is paid. If it costs you a few hundred dollars in accounting consultation fees in order to help save a a few thousand or tens of thousands of dollars in needless income taxes, I think you will agree it is a very good trade!

I have already saved many hundreds of thousands of dollars over the past 11 years of practice in this field for my clients, by practicing in this specialized field. And, if you want to explore the possibilities of converting your IRA to a Roth IRA, my services extends to that important option as well.

Or, if you want to try and figure this one out on your own, all of the best information on this subject comes from either Natalie Choate, an attorney, or Ed Slott, a CPA. You can "Google" them and get plenty of information from the best and most trusted sources available to you in my opinion. The only caution is they both tend to get even more "long in tooth" than I do and quite technical, so be aware of that. Now, please understand that neither of them are associated with my firm. But, the best reference materials available to advisors like me -- comes from them!

With more and more lawyers and CPA's also building their practices to give solid large IRA consultations, you may very well find answers with your own advisors who can help you and guide you in this important process. If you need your current tax professional to learn more on this subject, send them to this site!

But, if you feel stress on your own case and desire some help from a new  advisor right now, my skill is in integrating the tax information on Inherited IRAs and how it relates to your specific current or planned investment vehicle (home). With a short consultation with me, it can be assured that the best and most efficient new Inherited IRA account is the result. And of course, I will take that special care and attention that your current advisor might be ignoring, so ALL of the money remains tax-deferred if at all possible. Or, if you like, I will help your current advisor so a professional review and action plan can be put together for you.

DO YOU DESIRE BETTER ODDS THAN IN A GAME OF PLINKO?

One thing is for sure -- I will bet that you aren't finding this much important information elsewhere on the internet. I hope I have hit my target and shook you up some. Entertained some. And motivated you some so you take action.

I am staying away from giving you the boring specific IRS rules and regulations on Inherited IRA's for the very reason it will put you asleep, and motivate you to close your browser because you got overwhelmed with data you can't process or handle.

Just be assured if you need an Inherited IRA expert, those rules will be applied to your specific case and each case has special circumstances that require individual research anyway, before actual advisory can be given. It is not a one size fits all type of advisory business. 

Rather, it is kind of like the PLINKO game on the Price is Right television show. I start at the top and go one direction when a trust is the beneficiary of your Inherited IRA account. (There is a pretty good chance we may end up with a -0- on this one, but not always!)

But, I go another direction if it names you specifically as a "designated beneficiary". (This is the very best route of course!) And yet another direction if you aren't, which means you have only five years to remove the funds and pay your income taxes on them.

And then I help you split out again in different directions depending on if your deceased loved one had already taken RMD, before departing. And yet another direction if a disclaimer is desired or required by legal document declarations, or post mortem legal advisory (yes I would be happy to work with your law firm upon your proper authorization), that allows you to punt your inherited IRA to someone else in the family that may need it more than you do. (And who is younger, thus giving many more years of magic stretch time!)

As you have learned, proper management of this new investment you inherited is going to determine the odds if you do well with it or not. It truly is a lot like playing that PLINKO game! If you end up in the Inherited IRA Hell  I spent a lot of time talking about, all is not lost. Improper management will cause that, or perhaps -- just bad luck.  But continuing to avoid getting professional advice when you need it will take a lot more than the IRS will!

So, that specific advice you need, perhaps right now, is something you are going to have to pay for. You may pay me, or another qualified IRA expert for up front advice before you re-title the subject account.

Or, you can ignore what you have learned on this site and just follow the current investment advisors advice, which might even include his recommendation you just pay the taxes and be done with it. Or, he may get it right and do just fine in titling your new inherited IRA account. But, if you want a second opinion, I hope you have learned that getting one BEFORE any titling changes are made is paramount!

Yes, you will pay one way or the other for advice. You will either pay a small fee for a professional opinion when you need it over the life of the account, or, if you or your current advisor gets it wrong -- you will pay for not heeding the free advice you are reading right now. But, make no mistake about it. You will pay even if you get the titling right and the management of this account wrong!

If your Inherited IRA account now about to be in your hands is quite large, as many are, you truly have a tiger by the tail. If you realize that now and the potential of what could and should be one of the largest investments you have, I sincerely hope you can tame that tiger down to a proper level of understanding and supervision so it roars back with more retirement income than any other source possible!

If you need some tiger taming lessons, why not give me a call to see what I can do to help you?

Sincerely,

M.D. Anderson, President
Financial Strategies, Inc.

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Why?  Virtually every case I consulted on in 2011 contained some form of malpractice, misrepresentation or mistake (The 3 M's) in advice, paperwork or action that would have forced "taxation" on funds that the client wanted to "stretch".

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