When an IRA owner dies and leaves the IRA to a non-spouse beneficiary, like a child, sibling or grandchild, the recipient of the proceeds must be knowledgeable of the possible train wrecks associated with an inherited IRA. Several examples of problem areas follow. First, with your own IRA, you can do an indirect rollover, where you take money out of one IRA and, within 60 days, return it to another IRA. Assuming the funds are returned, there is no tax on this “rollover”. A non-spouse IRA beneficiary can only do a direct transfer to a properly titled inherited IRA. If the inherited IRA funds are taken out and then put in another IRA, they are taxable and the benefits of a stretch IRA are lost. According to an article in the Investment News periodical, this mistake cannot be corrected. If you have to move inherited IRA funds, only transfer them in a direct trustee to trustee move. Titling is important in an inherited IRA. The deceased owner’s name must appear in the account title, which should also make reference to this being an inherited or beneficiary IRA. For example, IRA FBO Tom Jones, B/O Bob Jones, deceased. Without proper titling, the beneficiary may have a memory lapse and treat the IRA as his own, which will nullify the inherited IRA and once again result in the entire balance being distributed and taxable.
It is also important to know that new contributions cannot be made to an inherited IRA. If, by mistake, a contribution is made, the account ceases to be treated as an inherited IRA and becomes taxable. Again, this is an error that is not correctable. If a non-spouse beneficiary inherited an IRA of $100,000 and made a current year contribution of $5,000 to the inherited IRA, the entire $100,000 has to be distributed and is taxable. Not a desired result. Note also that required minimum distributions are required with an inherited IRA, generally in the year after the IRA owner’s death. You can’t wait until you are 70.5. If you are a designated beneficiary (one who is named on the IRA beneficiary form), you can “stretch the required distributions (RMD) over your life expectancy. If not, you have to distribute the balance in the IRA no later than the end of the fifth year after the year of death.” Because the cost of mistakes related to inherited IRA’s, please consult with your tax or financial advisor before initiating transactions in an inherited IRA.
I am sure most of you are familiar of the term “unconditional love”. Beverly and I had the good fortune of babysitting our three-year-old grandson and his new four-month-old English lab. We were reminded quickly that lab puppies enjoy chewing on things with their sharp puppy teeth and that they are either snoozing or very busy, requiring a lot of attention. The grandson not only wanted attention, he wanted participation. Finally, a cat that will no longer be a house cat left fleas for the puppy to pick up. All this made for a quick four nights and five days, as you can imagine. The one image I was left with is unforgettable. When Charlie’s dad walked through our back door, the look, the undisguised joy, the body action I witnessed in my grandson can only be described as unconditional love. What a beautiful moment that made everything worthwhile. It was a reminder to me of the love I receive from my God and Savior each and every day. No strings attached and always present in my life, whether I realize it or not. I invite you to open your hearts to the same ever present love. You won’t be sorry. Our help is in the name of the Lord, the maker of heaven and earth. Blessed be the name of the Lord from this time forth for evermore.
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed. This material is intended for informational purposes only and should not be construed or acted upon as individualized tax, legal or investment advice. FSC Securities Corporation does not offer tax or legal advice. The views expressed are not necessarily the opinion of FSC Securities Corporation. Financial Solutions Group is a marketing name. Financial Solutions Group is located at 128 Versailles Blvd, Alexandria, LA 71301. We can be reached at (318)448-3201. Securities, insurance and advisory services offered through FSC Securities Corporation, member FINRA/SIPC.