Make Sure Your Kids Don’t Give
40+% of Your IRA Away

Good Morning Relaxing Retirement Member,

A year never ends without me hearing another horror story in financial circles about families losing half of their parent’s IRA to taxes due to a completely avoidable mistake.

This always reminds me to reinforce how your children can properly handle inheriting your IRA so your assets don’t mistakenly end up in the hands of the government.

Landmines are everywhere. If your children are not informed, almost half of your IRA could get lost to taxes in one fell swoop!

That doesn’t sound too inviting, so let’s take this opportunity to walk through an example of how your children and grandchildren can make an “informed” decision when they inherit the IRA that you’ve taken your entire lifetime to build.

Charlie and Doris

Charlie and Doris been married for 38 years, and have 3 children who are all out of college and in the workforce.

After Charlie retired, he rolled over his 401(k) and pension plan to an IRA where he named his wife Doris as his primary beneficiary and his 3 children as secondary (or contingent) beneficiaries in equal shares.

Two years into retirement, Charlie suffered a heart attack and passed away. (Sorry for the blunt shock value of the story, but it’s necessary to make the point)

When Charlie passed away, as Charlie’s spouse and beneficiary, Doris may transfer the money that was in Charlie’s IRA into her IRA without paying any taxes. (Key point: ONLY spouses can do this.)

Now, let’s fast forward ahead 3 more years. Doris gets sick, and after a long battle, she passes away.

At this point, Doris’ children have some decisions to make as the beneficiaries of their deceased mother’s IRA.

In far too many situations, here’s what happens:

They call the institution where the IRA was held (bank, investment firm, insurance company, etc.) to inform them that their mother has passed away and to find out what their options are.

Depending on who receives that phone call, here’s the answer that they’re likely to hear:

We’re very sorry to hear about your loss. We’re going to send you out an IRA distribution request form. Please each sign the form and return it to us along with a certified death certificate and we’ll get the checks out to you within 7 to 10 business days.”

Sounds simple enough, right?


What just happened?

Income Taxes Now Due on the ENTIRE IRA

The children just paid income taxes on the entire balance of the money in the IRA!

Depending on their own personal tax brackets, it’s likely that they gave up 40+% of their share in federal and state income taxes in one fell swoop!

In the most recent case I heard about, over $526,000 went to pay federal and Massachusetts state taxes in one fell swoop.

Imagine that. You work your entire life. You diligently save your money. You select sound investments. You do everything right and with one phone call to an uninformed company representative, 40+% of your hard-earned savings is gone in one shot!


What Should They Have Done?

Each of the kids actually had another option with their share of their mother’s IRA. One option was to just cash it all out. But, as I mentioned, that has enormous tax consequences.

The second option, which is all too often omitted from the discussion, is to “re-title” their portion to an Inherited IRA, leaving their deceased mother as the deceased owner of the IRA and them as the beneficiary.

By doing this, they are only required to withdraw and pay taxes on a small amount of the money from the IRA each year, leaving the rest to grow tax deferred for the rest of their lives if they wish!

The amount of money saved in the short term and the long term is staggering.

Now, in order to qualify for this “Inherited IRA” tax deferral plan, there are certain IRS requirements that they have to fulfill in order to make it work.

Next week, I’m going to outline the steps required by the IRS that your children and grandchildren have to follow perfectly in order to qualify.

Stay tuned!

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advic