WHO PAYS THE TAXES ON AN INHERITED IRA? 

   I just met with a nurse who is 52 years old.  Her husband died 2 years ago just before his 50th birthday.  She is working 2 jobs to put 3 teens through college.

   Luckily, he left enough life insurance for her to be able to pay off the house and put a little bit of extra money into savings.  She inherited his IRA and 401k plan.  She has a 401k plan at work and and old IRA from another job and will have 2 pensions plus Social Security when she retires.  

   I'm analyzing whether she should continue to contribute to the 401k plan or use a tax-free alternative.  All of her income from pensions and Social Security will be taxed.  She will not have any write offs after the kids are out of school since the house is paid off.

   One of her first questions to me was, "how can I reduce my income taxes?"  I told her that she probably can't without taking a mortgage but it will only be worse when she retires and that is what we will focus on.

   Do you know who pays the tax when an IRA is inherited?  If it is inherited by the spouse, there is no tax upon inheritance.  However, it will be added the to total amount counted for RMD (Required Minimum Distribution) when the spouse reaches
age 70 1/2.

   If it is inherited by a person other than the spouse (son, daughter, etc.) they have a few options: 

Lump Sum Distribution:

• If a beneficiary, spouse or other person elects to take a lump sum distribution from a inherited IRA, the disbursed money immediately becomes taxable income. IRA proceeds are considered to be ordinary income and taxed like any other earned income. The single distribution option is an all-in option: the entire proceeds must be distributed and the taxes due must be paid in that tax year.

Five-Year Payout

• An option for non-spouse beneficiaries including individuals, the estate and trusts is to roll the IRA into an inherited IRA. This IRA then has up to 5 years to pay out the assets to the beneficiaries/new owners. The disbursements can be made any time in the 5 years including waiting until the end of the 5-year period. Any distributions during the 5 years will become taxable income to the beneficiary in the year they are received.

Required Minimum Distributions

• A non-spouse beneficiary of an IRA can elect to have the IRA paid out in annual installments based on the beneficiary's life expectancy. This option allows the bulk of the IRA money to remain tax deferred over a longer period of time. The minimum distribution option can be selected instead of the lump sum or 5-year inherited IRA plans. The distributions must start in the year the beneficiary inherits the IRA; at least the minimum must be withdrawn each year and be included in the taxable income of the beneficiary.

Disclaim the IRA

• Any beneficiary can disclaim their inheritance of an IRA. When this happens, the IRA passes down to the next in line beneficiaries. Based on the status of these beneficiaries, they may use one of the above-listed options to receive or roll over funds from the IRA. The original beneficiary has 9 months after the death of the original IRA owner to disclaim the inheritance. This generation-skipping tactic may be used to transfer the IRA money to beneficiaries in a lower tax bracket or to those who need the money more without paying taxes on it twice.

IRS pub 590  Individual Retirement Arrangements. Always consult a tax professional for detailed up-to-date rulings. 

                                           
 CASH AS AN ASSET CLASS          

                                                 

         Having just celebrated our nation's 240th birthday -  Let’s ask George Washington, “is there a difference between ‘tax avoidance’ and ‘tax evasion’?" The answer is YES, and it is a very big difference in fact. Knowing about and using the allowable tax codes to provide tax-free income is not a crime – it’s a brilliant!

               Building a cash reserve that can be used to pay taxes on qualified withdrawals, pay off a mortgage or simply offset market downturns is a key element to retirement planning but most folks just don't do it.  They stuff every cent they can into a 401k or IRA plan thinking it is saving them money.  The horrible truth is that they are literally mortgaging their retirement because Uncle Sam will, in fact, ask for much - if not most, -  of that money back when you need it the most.  

  Savvy investors use different kinds of investments to satisfy different financial needs. Relying only on stocks & bonds, and only a small amount of cash puts you at a disadvantage.  Due to an unprecedented and extended low interest rate environment and overall market volatility the old “4% Rule” has been adjusted down to a new “2.8%” to maintain a portfolio over a 30- year retirement.  That means even if you can save a million dollars for retirement you can only afford to withdraw $28,000 per year if you expect that money to last over 30 years.  What if you could bump that up to 5% or 6% without risk?   Would that change your lifestyle?

By using a combination of properly-structured financial instruments, a synergistic effect can be created that could minimize exposure to market risk, assure the continuation of tax-efficient income, significantly increase the after-tax amount received from Social Security and much more.  Bottom line is more spendable income.    

If your goal is to be one of the small percent of Americans who can retire at the same or similar pre-retirement lifestyle level, it will take more than “ordinary” planning. Putting one great idea into action today could change the way you eat, play and live in your golden years.  

Stay Wealthy! 

The Love-Hate-Love Caregiving Conundrum

AARP 2015 study shows an estimated 43.5 million adults in the U.S.have provided unpaid care to an adult or a child in the prior 12 months. That's 1 in 7 households in the entire U.S.  I am almost 65 taking care of an 83 year old mom who has had 2 knees and a shoulder replaced so far due to crippling arthritis.  She doesn't cook (unless you count egg salad) and is not steady on her feet.  I love her but sometimes I hate (strong word I know) the situation.  I love her but hate that her husband did not provide for her financially.  I love her but hate that she allowed him to spend almost all of her money before he died.  I love her but hate that she just shrugs her shoulders about the situation we are in and believes that some miracle will come along and make it all OK.

Long-Term Care is real.  It is not a "concept."  We are living longer and 3 out of 5 households will have someone who needs care before they go to the great beyond.  Are you going to be that 80 year old who tries to take care of your 85 year old spouse who can't get to the bathroom on their own?

I've been showing families how to solve this caregiving conundrum for over 25 years and there are more options now than ever.  Do you want to be the caregiver or the head nurse who directs the caregiver you hire?  Stay in the "love zone" and buy long-term care insurance for yourself and your parents while you can still qualify. There is no charge for looking at options.

Welcome To Our Blog

We educate clients on a big-picture perspective by communicating the tried-and-true principles that will be good for today, tomorrow and later on down the road. I'm blessed to work with a talented, educated and experienced team specializing in “Safe-Money” Retirement Strategies. I've also been an Estate Planning Paralegal since 1994. Plus, I have over 20 years of experience about Long-Term Care plans and how they fit into your retirement planning.