Page 4 - Belco_Connections_Winter-2017

Avoid IRA Missteps

A lack of knowledge can lead to problems
& disappointments for your heirs
A message from Belco Retirement & Investment Services
Be vigilant, and be knowledgeable. Do you want to hand your heirs big tax
problems? Would you like to hand the IRS a sizable chunk of your wealth? Of course
not. But if you misunderstand the rules when it comes to inherited IRAs, you just
might. Here are some missteps that IRA owners and IRA heirs often make:
Thinking that a will or a trust can facilitate the transfer of IRA assets. IRAs
don’t pass to heirs through wills or trusts (a few rare exceptions aside). The beneficiary
form takes precedence; this is the form the IRA owner filled out and signed when
opening the account. Problems arise when:
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financial institution that hosts the IRA)
In these circumstances, IRA heirs commonly end up playing by the IRA custodian’s
rules. The resulting beneficiary may be the IRA owner’s estate, a very undesirable tax
consequence. It might be a contingent beneficiary, perhaps a very undesirable
emotional consequence. The lesson here is to keep the beneficiary form handy and to
let your heirs know where it is. 1
Taking lump-sum distributions. Too often, non-spousal IRA heirs see the
inherited assets as money to spend. They withdraw the entire IRA balance in one fell
swoop. Bad idea, since all that money will be subject to federal income tax. Due to
this move, they may lose a third of the IRA assets (or more). 2
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traditional IRA to house the inherited assets and simply take Required Minimum
Distributions (RMDs) from that inherited IRA under the appropriate schedule. Yearly
distributions from the inherited IRA must start by December 31 of the year after the
year in which the original IRA owner died.
t If a non-spouse individual is the beneficiary, these distributions can be
scheduled over the expected lifespan of the beneficiary as
calculated through IRS tables. This way, invested IRA assets
may keep compounding across many years with the
added benefit of tax deferral. 3
t If an estate is the beneficiary, things are different. If an
estate inherits a traditional or Roth IRA, 100% of those
assets must be distributed within five years. There is one
exception: if an estate is the beneficiary of an inherited
traditional IRA and the former owner was older than
70½ when he or she died, then the distribution rate is

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