Pennies from Heaven & Inherited IRAs

Recently an adviser sent me the following email. The email had an attachment that indicated that a named beneficiary was to receive a taxable distribution as a result of the death of an IRA owner. The amount was small – relatively speaking – $38,000. The adviser’s question was:

“Tom, it looks like this company is going to give this guy a 1099-R on the death benefit.  Can that be avoided if he transfers the funds to another institution as an inherited IRA (option C) before year end?”

And the short answer, which I studiously avoid, is “Yes.” However, there is much more going on in the facts and circumstances which I do want to visit. The beneficiary has a singular opportunity which is now being offered to him, the waiver of the 10% early withdrawal penalty. A distribution made to a designated beneficiary of an IRA, after the death of the IRA owner, is not subject to the 10% premature withdrawal penalty, regardless of the age of your beneficiary: in this instance, a savings of $3,800.Also, since a qualified transfer is being considered, it may be presumed that the beneficiary does not have a need for the inheritance, and therein lies the opportunity!  The beneficiary may want to consider a qualified disclaimer of the inheritance and allow the proceeds to pass to his children, perhaps to help with college or other needs.

To recap, the short answer is “Yes” but there is oh so much more which must be considered. You ‘gotta’ love personal financial planning – it is better than Sudoku!

I invite you to join me for this month’s Webcast: Investment Management and the Personal Financial Planning Process. We will review investment management in the personal financial planning process: the need for asset allocation; review asset classes; tax planning with investment management; and overview types of investment vehicles. The Webcast will be held on Friday, May 30 at 1:30 PM EDT. The course is approved for one hour of CPE and CE. To register for the class, please email us at hello@ttillery.com.

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