The Two Steps Your Kids Must Take
to Avoid Losing 40+% of Your IRA

Good Morning Relaxing Retirement Member,

Last week, we talked about the horrific tax consequences your kids will face if they don’t properly handle your IRA when you’re no longer here.

Landmines are everywhere!  If your children are not informed, and they fail to take the correct steps, they could end up handing over 40+% of the IRAs to the IRS and the state of Massachusetts (or any state with income taxes) in one fell swoop!

This is NOT an outcome that you want!

In this issue of The Retirement Coach Strategy of the Week, we’re going to walk you through the two steps your kids must take to avoid this calamity!

To revisit our case study from last week, we were talking about Frank and Carol who have been married for 48 years.  They have 4 children who are all out of college and in the workforce.

After Frank retired, he rolled over his 401(k) and pension plan to an IRA where he named his wife Carol as his primary beneficiary and his 4 children as secondary (or contingent) beneficiaries in equal shares.

Three years into retirement, Frank suffered a heart attack and passed away.

When Frank passed away, as Frank’s spouse and beneficiary, Carol transferred the money that was in Frank’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.  Carol gets sick, and after a long and courageous battle with cancer, she passes away.  (Again, sorry for the bluntness of the story, but it’s necessary to properly make the point.)

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

If they choose the path of least resistance without giving it much thought and simply withdraw the entire balance in Carol’s IRA, the entire balance is taxable at ordinary income tax rates.

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 situation we heard about, over $922,000 went to pay federal and Massachusetts state taxes.

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!

Option #2

Their second option is to establish an “Inherited IRA” upon your death which would allow the money in your IRA to continue to grow tax deferred for the rest of their lives.

The potential tax savings from this option is enormous.  Imagine your money continuing to grow without taxes for decades vs. withdrawing and paying ordinary income tax rates on the entire balance up front, and then reinvesting what’s left over.

However, in order to qualify, there are two steps your children (beneficiaries) must take by December 31st of the year AFTER you pass away:

  1. They must re-title your IRA as an Inherited IRA naming themselves as beneficiary. (This has to be done with an IRA custodian who can/will do it.  Not all of them will do it.)
  2. They must take a small required minimum distribution from the Inherited IRA each year (similar to your Required Minimum Distribution you must take at your age 70 ½.) However, it’s based on their life expectancy, not yours, so the amount they must withdraw and pay taxes on is much less.

** The key is to make sure they are aware of this option as you can’t do it for them before you pass away.  Unfortunately, most people are not aware of this.

After they examine all of their options, some of your beneficiaries may choose to receive your IRA in a lump sum (or partial lump sum) and pay the taxes up front.  That’s fine as long as they’re making an educated decision.

However, once they realize the short and long-term advantages, it’s highly likely that they will choose the Inherited IRA option so they can avoid giving up almost half your life savings!

Stay tuned!

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

P.S. Arm yourself with the questions you must ask to determine if your financial advisor has a legal obligation to work in your best interest at all times vs. the best interest of the company they represent. To receive a free copy of the Consumer Guide titled: “The 13 Questions You Must Ask Your Retirement Advisor (or Any Financial Advisor You’re Thinking of Working With) Before You Hire Them”, simply click this link:

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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 advice on tax matters specific to your situation.)