Thursday, May 28, 2009

Retirement Fears: What's In a Name?

"He that is strucken blind cannot forget the precious treasure of his eyesight lost."

What does that quote have to do with this week's Retirement Fears column? Not much of anything, except that the famous Romeo and Juliet quote follows the two key participants in this week's advisor-consumer story.

Juliet's father, aptly named Romeo, passed away and Juliet went to the bank to set up new accounts so she could close out her father's savings account. She also filled out the paperwork to transfer her father's brokerage account and IRA to the new accounts she set up in her name.

Big problem? You bet.

Romeo's name was nowhere to be found on the 1099-R and it didn't even specify the IRA as an inherited IRA. Now, Juliet owed tax on the entire $200,000 (at ordinary income tax rates) and lost out on the ability to extend distributions of the account out over her life -- a potential multi-million dollar mistake.

Here is how the mistake could have been avoided:

  1. After inheriting an IRA, make sure to set up the new account correctly. The new account title MUST contain the deceased IRA owner's name and must indicate that the IRA is an inherited (or beneficiary) IRA. For example, in our situation the account should have been set up to read "Romeo's IRA (deceased 10/1/08) FBO Juliet."
  2. Move inherited IRA money directly from one institution to another by "trustee-to-trustee" transfer. Non-Spouse beneficiaries of IRAs must move money this way, or else it becomes immediately taxable .
  3. One mistake can mean the end of your IRA. Make sure to work with an advisor who has specialized knowledge in this area to make sure you can avoid these mistakes.


--By Jared Trexler


Comment, Question, Discussion Topic on your mind? Click on the Blue Comment Link below and leave your thoughts then check back to see what other consumers and advisors think.