727.441.9022
611 Druid Rd E • Suite 105 • Clearwater, FL 33756
V. Raymond Ferrara, CFP®
MAY/JUNE 2016
| TAMPA BAY MAGAZINE 77
Chairman
Chief Executive Officer
Eric R. Ebbert, MBA, CFP®
President
Chief Operating Officer
INHERITED IRA PITFALLS
One of the most significant assets
accumulated during one’s lifetime might
be an IRA and/or other retirement accounts.
Choosing a beneficiary isn’t necessarily
as easy as naming a spouse and/or the
children. Why? Different rules apply when
beneficiaries inherit the IRA depending on
their relationship with the deceased IRA
owner and pitfalls exist for both spouse and
non-spouse beneficiaries.
For a surviving spouse, it is often assumed
and advised that the best alternative is for
the IRA to be rolled over to an IRA in the
surviving spouse’s name. However, this may
be ill advised. For example, if the IRA is rolled
over and the surviving spouse is under age
59 ½, the surviving spouse, prior to turning
59 ½, could not access the money in the
rolled over IRA without paying a 10% nondeductible
excise tax in addition to income
taxes. In this situation, it may be better to
set up an inherited IRA as a beneficial IRA
because there is no penalty to a beneficiary
for withdrawing money prior to age 59 ½. It
may also make sense to set up one of each in
some situations to provide further flexibility.
This is but one potential pitfall, so a spousal
beneficiary should evaluate all alternatives
before making a decision.
A non-spouse beneficiary (son, daughter,
and grandchild) cannot rollover the IRA
into their own name, but they can set up a
beneficiary IRA. They will have the option
of taking a lump sum, taking the proceeds
over five years, stretching the IRA over their
life expectancy, or taking differing amounts
each year as long as they take the Required
Minimum Distribution (RMD). If they don’t
take at least the RMD, this pitfall results in a
50% nondeductible excise tax on top of the
regular income tax that might be owed. The
same rules generally apply to an inherited
Roth IRA, but income taxes are not owed on
the amount withdrawn.
When there are multiple beneficiaries,
another pitfall often occurs when leaving
the IRA in one account or perhaps paying it
to a trust with multiple beneficiaries rather
than dividing it into separate accounts for
each beneficiary. If the money stays in one
IRA, the beneficiaries will be forced to take
the money out based on the life expectancy
of the oldest beneficiary rather than the
life expectancy of each beneficiary. This is
especially important if there is a wide range
of ages amongst the beneficiaries, or there
is a non-person beneficiary like a charity.
By separating the IRA, each owner of the
inherited IRA can make individual decisions
about how to invest the money, how much or
little to take out, and each will get to name
their own beneficiary who can possibly
continue the IRA if they inherit it. In short,
it can last a long time if properly handled.
Another pitfall is the failure of the IRA
owner to take maximum advantage of
the flexibility provided by setting up the
beneficiary designation in the first place.
Rather than naming just a primary and
contingent (secondary) beneficiary, the
IRA owner can have multiple layers of
beneficiaries which may allow for postmortem
estate and income tax planning. With
the use of disclaimers it might be possible
to pass the IRA at the owner’s death down
multiple generations.
An often overlooked beneficiary designation
is naming a charity as the beneficiary. Money
left to a qualified charity at death through an
IRA is not subject to income or estate taxes.
A pitfall in naming a charity, however, often
occurs when the charity is named along with
other beneficiaries. If the IRA is not separated
into individual accounts, the options to the
other beneficiaries will be limited. Thus, it
may make sense to set up a separate IRA
naming the charity as beneficiary.
The rules generally require that a
beneficiary take the first distribution no later
than December 31st of the year following
death. Even here there are potential
exceptions. The inherited IRA can be kept
with the same custodian, or it can be moved
to a new custodian. This gives the new owner
the chance to adjust the investments in the
IRA to match personal risk tolerance and
financial needs.
To learn more about avoiding the pitfalls
of naming beneficiaries, inheriting an IRA
and examining all of the choices in making
these important decisions, please give us a
call to take advantage of a complimentary
personal consultation.
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange Commission
(SEC) and have been in business since 1987. Our 12 professional advisors serve approximately 1030 clients in over 30 states. As of December 31, 2015 we were managing
approximately $1.177 billion for our individual, corporate, not-for-profit, and 401k retirement plans. Please visit our website at: provise.com. Investment Advisory Services
offered through ProVise Management Group, LLC.