Inheriting an IRA from a Deceased Spouse

The IRS gives a big break to spouses in this situation. As long as the money stays underneath some type of IRA umbrella and isn't withdrawn, no tax is owed. The key is knowing what rights you do and don't have. The first rule to know is that a spouse can follow the same basic pattern money-wise as an IRA beneficiary after the death of their spouse as before death. If withdrawals have been made in the past, some type of withdrawal can likely continue if set up properly.

The second rule to know is that a spouse has three basic options with regard to themoney. 1. Cash out the IRA all at once or in parts and pay the tax, which may be a larger amount if the withdrawal is made all at once. In addition, there maybe a 10% penalty for withdrawal if the either spouse is or was under age 591/2 . 2. Rollover the IRA funds to your own IRA. 3. Rollover the IRA funds to a Beneficiary IRA in the name of the deceased owner.

Two scenarios usually develop - one for younger folks and one for older folks. For those under age 70 1/2 or those who aren't intending to withdraw any money from the IRA: Most people look at rolling over the deceased person's IRA to their own IRA because no tax is paid (option #2). However, rolling over money to a Beneficiary IRA (option #3) may be a better choice if either person is under age 59 1/2. The Beneficiary IRA allows the spouse beneficiary to withdraw funds as if their age was the same as the deceased person. So, if Mr. Smith who is 60 dies and leaves his IRA to his wife who is 55, if she just rolls the money to her own IRA (like #2), she would incur a penalty if she touched it. She would have to wait almost 5 years to access that money penalty free. If the money were rolled to a Beneficiary IRA (#3), she could access funds with no IRS penalty. Withdrawals will be taxable in all cases, but the extra 10% penalty could be averted. In situations where life is in a state of flux, such as this, retaining the flexibility to tap money penalty free may come in handy. For those over age 70 1/2 and who are taking mandatory distributions: The spousal beneficiary can continue those distributions or alter them. There are other rules, but this is the short answer.

The bottom line is that a spousal beneficiary can rollover funds in some way, shape, or form and not pay tax. If however, they wish to withdraw funds, this can be arranged but planning must be done to avoid as much tax or penalty as possible. Consulting a qualified tax or financial professional would be wise in any case.

Local Column Cancelled in The Huntsville Times

As of a few weeks ago, The Huntsville Times Business Editor decided to take the paper in another direction - with more of a national focus. As the last local columnist writing for the Business Section, my column was "cut" and it will no longer been published. If you have questions or concerns about this action that you'd like to submit, please feel free to contact Steve Byers at steve.byers@htimes.com. Or, you could write an editoral if you'd like to share your opinions more widely, letters of no more than 250 words can be mailed to: Your Views, The Huntsville Times, P.O. Box 1487, Huntsville AL 35807 or faxed to 256-532-4420 (typed letters only) or emailed to: letters@htimes.com.

If you choose to write the Editor, here are the rules: Letters or emails must bear the writer's full name including middle initial, address with zip code, and daytime phone number. Middle initials and zip codes will be published. Other information is used for verification but not published or given to other parties. Individual letter-writers may be limited to one published letter every 30 days. Letters become the property of The Huntsville Times and will not be returned. Letters may be edited and may be re-used in any medium.

I share this with you for a few key reasons. First of all, I want you to know that I see this as a natural evolution in my career and life - a positive move forward. I have been praying for God to "open and close the right doors". Writing the column was excellent "press" for our firm but was certainly a drain on my time. So, my intention is not to have a public outcry for the column in hopes of having it reinstated. My hope is that our local paper will receive comments from people across our city to make our paper better. There is quite a difference in opinion at The Times as it's future direction. They are at a critical point, losing market share to the internet. Any feedback they can get from loyal readers will be of help. Although I got many comments on my column, The Times heard very little. They need our opinions, our voices, and our ideas. I hope that many of you will take the time to email Steve and the Editorial desk with your feedback on how to help Huntsville continue to grow, be progressive, and be supported by a strong paper with a variety of information.

Inheriting an IRA or 401K - If You Aren't a Spouse

A tremendous number of Americans have money in an IRA. Many more are sinking huge portions of their salaries into a 401(k) accounts. With an increasing number of employers also contributing matching funds, it is no wonder that the fastest growing, largest pot of money in our society today sits in some sort of retirement plan.

Many never think about what happens when family members inherit these accounts and The Tax Man wants his piece of the action.

A ticking time bomb.
IRA's and 401(k)'s are not inherently bad investments. Quite to the contrary! Most of them trigger a tax break when money is added. At the very least, no tax is owed on earnings until the money is ultimately touched. There is an increasing trend to retire and either live off the earnings of these accounts or never touch them at all. Even the mandatory withdrawals at age 70 ½ don't deplete the account for a long time. This leaves a lot of money to beneficiaries that has never been taxed. Leaving money to your spouse as beneficiary doesn't trigger any taxes if no withdrawals are made. But once the funds finally make it to the children, that's when things get interesting. Too many times, the children just cash out the whole account minus the tax. On average, this leaves only 50-80% of the balance in their hands.

Beneficiaries other than a spouse can cash out and pay a ton of tax OR take payments which allow most of the money to continue to grow. This cushions the tax blow. Payments are made from an account called a Beneficiary IRA and can be paid out - for as short as 5 years or as long as a lifetime. For more money in the long run, the Beneficiary IRA is the only way to go.

Let's look at an example.
Out of a $500,000 IRA, if a son decided to cash out, he would walk away with about $300,000 after tax. Instead, if the son were age 50 and set up a Beneficiary IRA, he would start off taking an income of around $16,000 per year AND have close to $750,000 at his age 65 if the investment grew at 6%.

Rules get even more tricky if no beneficiary is listed or if "estate" is listed on the beneficiary form. Also, if the beneficiary is a non-living person (like a charity or trust), then other rules apply.

It is best to consult a qualified financial planner on the subject, especially if your beneficiary has designated multiple children or a charity. You could end up limiting the growth of your 401(k) or IRA when it passes to your heirs just by not knowing your options or dying at the wrong time!

Should You Cancel Life Insurance at Retirement?

Should I Cancel My Life Insurance When I Retire?

The light at the end of the tunnel. The Big Day ? Your Last Day. We all work so hard to get retired that sometimes that there isn?t time to fully think through all the financial changes. We?ve all been taught to get rid of unnecessary expenses but what about life insurance premiums? Should we continue to keep paying?
We suggest that most people review two things when it comes to their life insurance going into retirement.

First, seek advice on how much coverage is actually needed. Perhaps your need for coverage has actually gone down now that children are out of the house. Perhaps your need has gone up because you are using the life insurance as a fall back in the event you die and no pension is left to your spouse. Inflation and your expected longevity (or lack thereof) also plays a role.

There are a few questions you can ask yourself to determine a rough amount of appropriate coverage. In the event of death, do I want to
? pay off my house for my spouse or heirs?
? pay off additional debts?
? pay for the cost of a funeral?
? pay a set amount of monthly money to my spouse since some of my other benefits (pension, social security, etc.)

If the answer to any of these questions is ?yes?, then likely you need some type of life insurance.
Second, we suggest that you determine what type of coverage is most appropriate given your new situation. Term insurance is less expensive but goes away after a time. Universal and whole life are more expensive, but build a cash value and are intended to cover you for longer periods of time. Variable universal life is an investment geared cash value type of coverage which also may be worth exploring.

A few last tips:
? If you have cash value built up in a policy already, you will want to evaluate your status. Typically keeping that type of coverage or decreasing your face value amount down to a paid up policy is a way to continue coverage but decrease your expenses going into retirement.
? If you have term insurance, you may want to check to be sure you?ve got coverage that will extend for the period of time you want and perhaps add on some options to purchase additional insurance (or convert it to permanent cash value insurance) with no physical exam.

The bottom line is that life insurance, even in retirement, can play a major role in the whole financial planning process.