The idea of estate planning is taking on more importance because multiple generations are more openly discussing money issues and realizing/acknowledging that since money flows up and down generations,  how it  flows between generations should always be a consideration (and is the reason I so strongly suggest finding a good estate planning attorney sooner than later).

This made me think about my 11/19/2009 post “IRAs – The Basics” (http://thethinpinkline.com/2009/11/19/iras-the-basics/) which talked about traditional and Roth Individual Retirement Accounts.  I thought I should add a basic postscript about what you need to know if you inherit someone’s IRA.

Inheriting an IRA is more involved than inheriting a savings account or a valuable piece of jewelry or an expensive painting.  If someone leaves you their IRA, the decisions you have to make regarding what you’re going to do with it can be tricky and they can be taxing – as in having an impact on your tax bill.

There are several options.

You can choose the “cash out” option and get the money in one lump sum but since you will owe taxes on it all at once – most financial advisors would say the “cash out” option is rarely the right choice.

If you inherit an IRA from someone other than your spouse, you have two options:

• Starting December 31st of the year following the death of the original IRA owner, you can establish a beneficiary IRA and take annual distributions based on your life expectancy as calculated by the Internal Revenue Service and have the option to take a lump sum payout at any time.
• Or, you can opt to take no distribution and cash out the IRA completely by December 31st of the fifth year following the original owner’s death but you cannot continue making contributions.

If you inherit an IRA from your spouse, things are much simpler:

• You can claim the IRA as yours by just rolling it over into a new IRA in your name.
• Or, you can merge it with an existing IRA of your own
• Unlike non-spouse beneficiaries, you can keep contributing to it.

As you make your decision on which option is right for you, a couple of positive consequences you need to remember.  The longer you stretch your distributions over time, the longer you have to deal with any tax bill payments.  And, the more money you leave in a traditional IRA, the longer the funds have to grow tax-deferred which affords you the benefit of the magic of compounding.

It’s your money so take it personally!

Here’s to your health and wealth.

TAGS: estate planning, IRAs

An I-R-A is an Individual Retirement Account although for many Americans it stands for Involved or even Inexplicable Retirement Account.  

According to a recent survey by a subsidiary of AARP, 44% of adults don’t really understand how IRAs work and more than a third aren’t sure or don’t know whether they’re eligible to contribute to one. 

So let’s take a look at IRA basics. 

An IRA is simply a personal account that gives you tax advantages for saving for retirement.  There’s a wide range of IRA investments.  There are certificates of deposit, stocks, bonds, and mutual funds (and even more choices under what’s called self-directed IRAs). 

There are actually eleven types of IRAs but the two people hear about the most are the traditional IRA and the Roth IRA.  Both will allow you to accumulate wealth without paying taxes on your profits along the way.  But the basic big difference between the two: 

• the traditional IRA offers tax-deferred savings  meaning the money you deposit isn’t taxed until you withdraw that money (hopefully many years later)
• the Roth offers tax-exempt savings  meaning you never pay taxes on your gains as long as you follow the rules).

Translation:  the traditional IRA ultimately sticks you with a tax bill for those profits.  The Roth doesn’t.

With the traditional IRA:

• you may be eligible to deduct your contributions
• if you can’t deduct contributions, earnings grow tax-deferred until withdrawn
• withdrawals are taxable
• withdraw before age 59 1/2, in most cases you’ll have to pay both income tax and a 10% penalty
• people age 50 and older can make an additional $1000 “catch up” contribution each year (though two-thirds of Americans in the recent survey didn’t know this).  

With the Roth IRA:

• contributions are never deductible
• available to single filers earning up to $95,000 annually
• to couples making up to $150,000
• great flexibility
• withdrawals (including earnings) are tax free
•  if the IRA has been open for at least 5 tax-years
• and if you’re older than 59 1/2
• as long as you follow the rules, you never pay taxes on your gains.

Many people unfortunately, believe they have until the October 15^th tax-filing extension deadline to contribute to their IRA.   This is unfortunate and incorrect.  If you’re going to make an IRA contribution for this year, it must be made no later than April 15^th, 2010.  

Here’s to your health and wealth.

TAGS: IRAs, Money Basics, Roth IRA, traditional IRA