As with many retirement and savings options, there are clauses located in the small print which relate to many aspects of how the money is handled. This can include anything from how and when it’s appropriate to withdraw money, and what happens if someone inherits your IRA. Very often, inheritors of IRAs are unaware of the rules in place around IRAs, and what it means for them and the account once it has been inherited.
To start off at the beginning, an IRA is an Individual Retirement Account, which a person may elect to pay into to save for retirement, instead of a 401k option. A person can elect to save in a number of different ways, using different IRA options. For instance one of these options would be an IRA gold account, which is based on saving against the value of gold, which is known for increasing dramatically over time to give a much higher return on investment. For more information about this style of IRA account, visit www.goldiranavigator.com.
Whichever IRA option you or your loved one chooses to adopt, you should be aware (and also make them aware) of the clauses in the IRA contracts around inheritances, and the rules and regulations you’ll need to comply with.
The biggest and most obvious first mistake we make is regarding the beneficiary forms received when opening an IRA. The biggest mistake is not filling one of these in. The second biggest mistake is not keeping it up to date. Such is life that people get married and divorce, they may have had children or not, and will often meet another life partner in the future. However, the last thing on our minds when thinking about whether or not to get married for a second time, is to update our IRA accounts with this new life partner’s details. However, it’s hugely important to do this, to ensure the correct beneficiary receives your IRA. Not only that, but it’s important to ensure all details are correct, even when the beneficiary remains the same. For example you may move and have incorrect address and contact information on the form, causing problems further down the line.
Another mistake people make is failing to realize that if that minimum required distributions have already begun when the IRA owner dies, the 5-year rule does not apply at all. The 5-year rule states that there should be complete distribution by 31st December on the fifth year after death. However this doesn’t apply here, and unfortunately there is no loophole or cure if money is paid out incorrectly.
There’s another mistake which has only applied very recently, due to the changes in law made by the Supreme Court. On June 12th, the Supreme Court eliminated asset protection benefits of an Inherited IRA. The mistake people make today is failing to take that into account when considering who their IRA will go to. For example, naming a trust as beneficiary could be the ideal way to combat this, and should at least be considered as an option for creditor protection. On top of this, using a trust as beneficiary can help to ensure that IRA distributions are made as slowly as possible, therefore increasing potential return by maximizing the overall value of the account.
It’s important to seek professional financial help when considering this option as all trusts must be drawn up and written to comply with the state’s trust law. It must also include specific details like effective creditor protection aspects, as well as complex rules which apply only to trusts which hold inherited IRAs. It’s also worth taking into consideration that IRAs must be worth a certain amount in order to qualify for setting up a trust. As well as having to be worth a certain amount, there are other costs associated with creating a trust, and on-going administration costs to consider.
There may be more factors which develop as laws change, but the above are the main mistakes associated with inherited IRAs. We hope this article enlightens you enough so that you don’t fall victim to or lose out because of these issues which people often overlook or misinterpret.