Will Your Kids Lose 45% of Your IRA??

Having to deal with the emotional and psychological effects of losing a spouse or parent is always difficult.

Having to also deal with their financial affairs and the tax implications is enough to put you over the edge.  The consequences of making a wrong decision are enormous.

Landmines are everywhere, especially when your family inherits your IRA and/or 401(k).

If they’re not informed, almost half of your IRA could get lost to taxes in one fell swoop!

Doesn’t  sound too inviting!

Let’s 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.

Ron and Rose

Ron and Rose been married for 40 years, and have 3 children who are all out of college and in the workforce.

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

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

When Ron passes away, as Ron’s spouse and beneficiary, Rose may transfer the money that was in Ron’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.  Rose gets sick, and after a long battle, she passes away.

At this point, Rose’s 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 40-50% of their share in federal and state income taxes in one fell swoop!

Let’s suppose that each of their shares in their mother’s IRA was $500,000.  That means that as much as $225,000 would instantly go to pay federal and state income 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, 40-50% 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.

Stay tuned to discover the steps required by the IRS that your children and grandchildren have to follow perfectly in order to qualify.

The Financial Media Salivates

Here’s Wall Street’s Market Watch on Monday, June 24th at 10:18 a.m.:

Headline: “U.S. Stocks Slide on China-Led Global Selloff”

Monday’s selloff comes after last week’s bruising selloff on Wall Street…European stocks tumbled and Shanghai stocks melted down….”

After quite a run so far this year with very few down days, equity prices cooled off toward the end of last week and now into this week.

Not good or bad news for all of us, but GREAT news for the financial media who’s been starving for a hiccup to start the chorus of alarm bells to garner your wavering attention.

After all, it’s no fun being in the financial media business when market price volatility is only on the up side. In order for them to put their best copywriters to work, they need some down side too!

Notice the terminology in the headline and first paragraph:

▪   “Selloff”

▪   “Tumbled”

▪   “Melted down!”

Doesn’t the term “selloff” just scare the heck out of you?

Have you ever thought about the term “selloff”? What exactly does that mean?

It sounds like everyone who’s ‘in the know’ is selling, thus you’re missing the boat by not doing so too.

The reality is there’s a fixed number of shares circulating out there. For every share of a given company that is sold, there is another person on the other end of that transaction who’s “buying”.

We have to always remember that!

Couldn’t they just as easily say, “….Global Buyoff” because for every person “selling” their shares, there’s an equal number of shares being “bought” by someone else.

In other words, for every person who chooses to sell (for whatever reason they have for doing so), there’s another person on the other end celebrating their good fortune because someone’s willing to sell them shares in the company they want to own at the price they’re willing to pay for them!

I know this sounds so simplistic, but it’s so important to protect your confidence and not allow brilliant terminology used by top financial media copywriters to influence your carefully prepared long term plans.

Reality Again

The reality of what’s happening to prices of companies (stocks) right now is “this is normal”!

As a rational, long term owner of shares of the great companies of the world, prices temporarily cooling off does not, and cannot qualify as news.

Nor does it qualify as an event worthy of discontinuing your ownership, i.e. selling!


Because market prices retreating 5-10% is nothing new. Just as market prices rising 15+% earlier this year didn’t alter your plans.

If you’ve never heard this statistic before, here’s a terrific one to plant in your memory during cooling off periods like this: the average peak to trough “intra-year” drop in the price of the S&P 500 Market Index is 14%.

Let me repeat and clarify that for a moment because it’s a very, very important fact:

In any given year, the average percentage drop that we’ve experienced at some point during that year is 14%. In other words, if you take a look at the high and low points of each year, you’ll see an average price drop of 14%.

What we can take away from that is that it’s completely “normal” for the stock market to have cooling off periods during any given year.

It shouldn’t necessarily give you the “warm and fuzzies” and lead you to celebrate, but it also doesn’t qualify as a phenomenon worthy of panic.

Unfortunately, this is not how the overwhelming majority of retirees think and behave. They spend their lives in constant reaction to everything which leads them to make the same costly mistakes over and over again.

Feel proud of the fact that you’re not one of them.