Disaster Averted as Advisor’s Guidance
Saves Investor $35,000 in Federal Income Tax on
$100,000 Inherited IRA
The story I am about to tell you is true. It illustrates the potential consequences of bad advice and the results that can be achieved when you have the advice of a specialist.
Recently, the mother of one of my clients (let’s call him “Josh”) passed away, and Josh was to inherit her IRA. The IRA was held at a large, nationally-known brokerage. The financial advisor at the brokerage gave Josh forms to complete to change ownership of the IRA from his mother to him.
Fortunately, Josh, knowing that I specialize in the area of IRA distributions, had the foresight to consult with me first. After reviewing the forms, I explained to Josh that had he completed and submitted them, he would have paid $35,000 in federal income tax on his mother’s $100,000 IRA, leaving him with $65,000. This would have been the worst way to handle this transaction.
Upon hearing this, Josh gave me another form given to him by the brokerage. To my disbelief, this form (once signed by Josh) would have held the brokerage harmless (not at fault) for any adverse tax consequences he would have experienced from the distribution advice provided by the brokerage.
I immediately contacted the brokerage and spoke to the financial advisor about the correct procedure for transferring the IRA that would allow Josh to receive the entire $100,000 IRA with zero immediate tax consequences. The advisor was not familiar with the concept. After I explained how it worked, he forwarded the correct forms to Josh. Because of the technical aspects of this transaction, and the potential $35,000 federal income tax consequence, I supervised the entire transaction from the brokerage to my client to ensure that the entire $100,000 IRA was transferred income tax-free. If even the slightest procedural mistake had been made during the transfer of the IRA, there would have been no way to rectify the situation, and Josh would have had to pay $35,000 in federal income tax.
You may be thinking that the best part of this story was the fact that $35,000 in tax was saved. But it’s not.
Because Josh now holds an inherited IRA, he will be able to “stretch” it over his remaining 30-year IRS life expectancy. At an 8 percent growth rate, Josh will take nearly $450,000 from his mother’s $100,000 IRA. This strategy, when properly implemented, can turn relatively small sums into large legacies.
Had Josh received only the $65,000 after taxes, his account would not have retained its status as an IRA, and the strategy described above, as well as the tax-deferred growth over 30 years, would not have been available.
Lesson learned: When it comes to your retirement funds, you should make certain that your advisor is a specialist, not a newcomer who may be learning his lessons at your expense.