Inherited IRA FAQ
Sep/090
What is an Inherited IRA?
An inherited IRA allows a spouse or non-spouse beneficiary of an IRA to keep his inherited IRA assets tax-deferred until the IRS requires the funds to be distributed. When the account holder dies, a spouse beneficiary may either transfer the assets into an inherited IRA, complete a spousal transfer and treat the assets as his/her own. A non-spouse beneficiary may transfer the assets into an inherited IRA in his/her own name, and begin taking distributions on a distribution schedule based on his life expectancy.
Who can open an Inherited IRA?
Any spouse or non-spouse beneficiary of a Traditional, Rollover, SEP, SIMPLE or Roth IRA can open an Inherited IRA. With an Inherited IRA, the assets can remain tax-deferred - until IRS regulations require that they be withdrawn.
If I am a non-spouse beneficiary, can I just roll the IRA assets I inherit into an existing IRA account?
No, only spouse beneficiaries can treat inherited IRA assets as their own by transferring the assets into an existing or new (non-inherited) IRA.
Can I make additional contributions to my Inherited IRA?
No, contributions to Inherited IRAs are not permitted.
What are the rules for taking distributions from an Inherited IRA?
A beneficiary must first transfer the funds into a beneficiary IRA account. If he/she chooses not to take a lump sum distributions, there are several different options governing the amount and time frame of the distributions depending on several factors such as age, type of IRA, and type of beneficiary.
When can I take money out of my Inherited IRA?
You can make redemptions from an Inherited IRA at any time after it is re-registered into your own name.
Am I required to take money out of my Inherited IRA?
As the owner of an inherited IRA you may be required to either liquidate the account within five years of the December following the original owner’s death OR to choose by September of the year following the original owner’s death to take substantially equal payments over the longer of yours or the original owner’s life expectancy.
What is the deadline for establishing separate “inherited IRAs” so that each beneficiary can use his/her own life expectancy to measure MRDs?
The deadline is Dec. 31 of the year after the year the IRA owner died. The beneficiaries can split up an inherited IRA at a later date; however, a division occurring after the above deadline would not be effective to change the applicable life expectancy for measuring MRDs. All beneficiaries would have to use the oldest beneficiary’s life expectancy to measure MRDs if the “separate accounts” are not established by the end of the year after the year of death.
Inherited IRAs
Aug/090
When our loved ones die and leave behind assets in an IRA account, it is an opportunity to make sure we benefit from continued tax-deferral of investment assets. Tax deferral is one of our favored strategies for building wealth, and we need to preserve tax-deferral whenever we have the opportunity. This article will help guide you through the decision points of an inherited IRA. You’ll need to know:
1. The type of IRA beneficiary - spouse, non-spouse, estate, trust or charity.
2. The type of IRA - Traditional or Roth.
3. The age of the IRA account owner at the time of death.
4. The date the IRA account was opened if a Roth IRA.
Spouse Beneficiary
A spouse inheriting an IRA has the most options, but most likely has the easiest decision.
1. Spousal Transfer - You move the assets into your own IRA (an existing one or a new account set up for the purpose). You get to treat the assets just like your own IRA holdings, and they are subject to all the rules that apply to you as an IRA holder. You get to designate your own beneficiary. Spouses who are not the sole beneficiaries are not allowed to use this option. We would recommend most every sole beneficiary spouse take this option and perform a spousal transfer.
2. Lump Sum Distribution - All the assets are withdrawn, immediately. If the funds are subject to taxes, they must be paid all at once. There is no early withdrawal penalty. We would only recommend this option to a spouse who is significantly far away from reaching 59 and 1/2 years and will need the money immediately.
3. Inherited IRA 5-year option - The assets are transferred into a special IRA account called an Inherited IRA and must be distributed by the end of the fifth year after the death of the original account holder. You get to designate your own beneficiary. This option is not available if your spouse was over age 70 1/2. We don’t see a need for a spouse as sole beneficiary to use this option.
4. Inherited IRA Life Expectancy option - The assets are transferred into an Inherited IRA account (or separate Inherited IRA accounts, if there are multiple beneficiaries) and annual distributions are made based on the life expectancy of those who have inherited the IRA. You get to designate your own beneficiary. We don’t see a need for a spouse as sole beneficiary to use this option.
Non-spouse Beneficiary
A non-spouse inheriting an IRA has fewer options.
1. Lump Sum Distribution - All the assets are withdrawn, immediately. If the funds are subject to taxes, they must be paid all at once. There is no early withdrawal penalty. We would only recommend this option to a person who is significantly far away from reaching 59 and 1/2 years and will need the money immediately to payoff debt or for other major expenses such as paying for college.
2. Inherited IRA 5-year option - The assets are transferred into a special IRA account called an Inherited IRA and must be distributed by the end of the fifth year after the death of the original account holder. You get to designate your own beneficiary. This option is not available if the person from whom you inherited the IRA was over age 70 1/2.
3. Inherited IRA Life Expectancy option - The assets are transferred into an Inherited IRA account (or separate Inherited IRA accounts, if there are multiple beneficiaries) and annual distributions are made based on the life expectancy of those who have inherited the IRA. You get to designate your own beneficiary. We see this as the most popular option for non-spouse beneficiaries option.
This information is intended to give a quick overview of the issues related to inherited IRAs. We suggest seeking the advice of a tax attorney. Also, please use the IRS publication on this topic.
If you would like to discuss you Inherited IRA situation in more detail, please call me at (813) 282-7870 or send me an email at derek.pilecki@gatorcapital.com.
Derek Pilecki
Gator Capital Management
(813) 282-7870
derek.pilecki@gatorcapital.com
7 Reasons to Rollover 401k Accounts to an IRA
Jun/090
When I leave a job, I am a big fan of rolling over my 401k balance into my IRA account at Fidelity. It is usually one of the first things I do after changing jobs. Many prospective clients I meet have several legacy 401k accounts at various employers. I encourage them to consolidate their old 401k accounts into a single Rollover IRA account. Here list a list of reasons to Rollover 401k Assets into an IRA:
1. Consolidate assets to one financial provider – Moving all of your 401k accounts at different former employers to one IRA account eliminates administrative hassles. If you move, you only need to change address with one provider instead of several. You only have to remember one website login and password to change investment choices. Having the assets at one provider makes it easier to build a diversified portfolio. When the assets are spread around in several 401k plans, you have a harder time monitoring your portfolio and making sure you are not too concentrated in one asset class. Some clients find by having the all of their retirement assets in one location they take the account more seriously. They are more diligent in monitoring the account and the underlying investments. They are faster to make changes when things going well. Lastly, most providers (Fidelity included,) give customers a better deal for having more assets in their accounts. The better deal could come from lower fees, lower commission rates or additional free services.
2. 401k Plans are expensive – In addition to the fees charged by the underlying funds in a 401k plan, there is usually an administrative fee charged as a percent of assets. It is even worse because both sets of fees are opaque to the investor. By moving the 401k balance into an IRA, you will have transparency on the fees you pay. If you want to remain in mutual funds, you’ll be able to select a fund with reasonable expenses. If you decide to invest directly in stocks, you’ll just pay the commission to buy and sell the stock.
3. Broader Investment Choices – A Rollover IRA will have close to unlimited investment choices. On the other hand, a 401k plan will have limited options. Most have between 5 to 15 investment choices. Even the very good 401k plan at Goldman Sachs had only about 30 investment options. The major discount brokers have access to virtually every mutual and stock. I don’t see a reason to limit your choices. One might argue that only a high quality investment can get on a 401k platform, but in reality, who knows why those particular investment options are on a company’s 401k platform. Maybe someone on the investment committee has an unconscious affinity for particular brand of mutual funds or maybe the investment option won a place on the platform after good (but unsustainable) streak in the market. More options are better, and Rollover IRA have many more options than 401k plans.
4. Option to convert to a Roth IRA down the road – You have to rollover a 401k to a Rollover IRA, but once you have a Rollover IRA you can convert to a Roth IRA. A Roth IRA provides some advantages such as tax-free withdrawals, no minimum distributions at age 70 ½, and no penalties for certain early withdrawals. Starting in 2010, there will be no income limits on conversions from Traditional IRA accounts to Roth IRA Accounts.
5. Stale Investment Choices – By leaving your money in a 401k Plan, your investment choices may become stale. 401k plans change their investment options from time to time. Often, the 401k Plan will replace an existing fund with a similar fund and shift all of the 401k Plan participants’ investments to the new fund. Other times, a 401k plan may eliminate an investment option and there is no replacement or the replacement is different enough that the 401k Plan’s Trustees don’t feel comfortable shifting participants from the old fund to the new fund. In these instances, the 401k Plan will send you a letter telling you about the shift and asking you what to do. If they are not able to find you or you do not respond, your money is liquidated from the old fund and investment into the 401k Plan’s money market option, which is not a healthy long term investment. By moving your assets to an IRA, you want have to deal with this issue.
6. Tracking Your Investments – 401k Plans often invest in a separate account that clones an existing mutual fund. The separate account is traded alongside the mutual fund, but it may have a different fee structure. This makes tracking the underlying investments in a 401k Plan difficult if not impossible in popular portfolio management software such as Quicken, Microsoft Money or Yahoo! Finance.
7. Estate Planning – A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extent the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is not such opportunity with a 401k account held at the time of your death.
There are the several reasons I like to encourage clients to rollover 401k balances into an IRA account. If you have questions or a unique situation, please feel free to call, email or comment on this post.
Derek Pilecki
Gator Capital Management
derek.pilecki@gatorcapital.com
(813) 282-7870