Inheriting Retirement Plan Funds

When you inherit funds held in an IRA or 401(k), profit sharing, 403(a), 403(b) or 457(e) retirement plan, how you are permitted to handle the money depends on your relationship with the deceased.

If you’re a surviving spouse, you can, if you choose, roll the funds directly into your own accounts and treat the money as yours. A direct trustee-to-trustee rollover – rather than accepting a check and within 60 days depositing the proceeds into your own IRA – is usually recommended.

When you inherit from a spouse and handle the funds in this manner, you won’t have to pay any penalty even if you’re under age 59½ – unless you take a distribution from the funds – and you won’t have to begin taking required minimum distributions (RMDs) until you reach 70½, no matter the age of the deceased.

As a surviving spouse, you can also treat an inherited Roth IRA precisely as you would your own Roth account. You’re not required to take a distribution, and if and when you do make withdrawals, the funds will be free of income tax, as long as the account has been in existence for five years and you're over age 59½.

More Spousal Choices

You have other choices, such as transferring inherited assets from your spouse's IRA into an Inherited IRA. This could be advantageous if you are significantly older than your spouse, as this would possibly allow you to delay beginning to take RMDs until the year your spouse would have turned 70½.

If you decide you don’t need the assets, you can disclaim your inheritance, an act that would pass the funds to the next eligible beneficiary. If he or she is younger, and takes RMDs based on his or her life expectancy, the result is smaller mandatory withdrawals, leaving more funds in the account for potential for long-term growth.

RMD Rule for 2009

Just for this year, as you are no doubt aware, the mandate that everyone age 70½ or over must take an RMD has been suspended for those who would normally have been required to take one. Bear in mind, the RMD requirement returns in 2010.

Not having to withdraw funds for 2009 is possibly an advantage for those who don't need the money, because leaving it in tax-advantaged funds allows the potential for more account growth. Of course, if you need the money, you can make withdrawals at any time.

Non-spousal Rules

The rules are very different for non-spousal beneficiaries of tax-qualified plans. If you’re such a beneficiary, you may set up a direct trustee-to-trustee transfer of funds into a carefully titled Inherited IRA, but you cannot roll inherited monies into your own IRA.

In addition to individuals, retirement fund inheritances may also go to trusts, charitable institutions or estates, but differing rules apply in every case. If you have questions, don’t hesitate to give me a call.

Economic Update: Recession’s End May Be at Hand
By Dr. Scott J. Brown, Chief Economist

Recent data have been consistent with the view that the worst of the economic decline is behind us. That’s not the same as a recovery, but a slower rate of decline is a step toward reaching a bottom.

The recession officially started in December 2007, but things took a sharp turn toward the worst last fall as a financial panic developed. Firms trimmed workforces sharply, curtailing capital spending plans. Gross domestic product fell sharply in the fourth quarter of 2008. In the first quarter of 2009, the economy continued to contract, but much of the decline was due to a faster pace of inventory reduction.

Data this spring suggested a possible stabilization in the housing market. Consumer spending remained soft, and job losses, high by historical standards, began to moderate. The job market is a lagging economic indicator – expect to see further job losses even as the economy begins to recover, but the pace of job destruction needs to slow to ensure that a recovery is in the works.

Gradually Stimulating

Tax payments fell sharply in the first half of 2009 while transfer payments – mostly unemployment insurance benefits – increased, helping to cushion the downturn. Some parts of the American Recovery and Reinvestment Act have begun to take effect: tax withholding went down in April. Less than a quarter of the fiscal stimulus package arrives this year. Half will arrive next year. While this won’t “jump start” the economy, it should help the recovery.

Federal Reserve policy has been accommodative. Many market participants fear the Fed is sowing the seeds of future inflation, but policymakers are confident that accommodation can be eased without generating higher inflation. The large amount of slack in the labor and production markets should prevent inflation from taking hold.

The economy appears likely to bottom out in the second half of 2009, with a gradual recovery in 2010. Recessions caused by financial crises tend to be severe and long-lasting, with lengthy recoveries. That is likely to be the case this time.

There is no assurance any of the trends mentioned will continue in the future.

Financial Planning:
Don’t Underestimate Future Costs of Higher Education

Unless May 29 was your birthday or anniversary, it may have seemed an unremarkable date, despite the college savings industry’s efforts to have you recognize it as “529 College Savings Day.” Sallie Mae, the world’s largest student loan company – not a government-sponsored agency, despite its name similarity to Fannie Mae – used the occasion to release a study showing that only 62% of parents of college-bound children are saving for college.

The vast majority of parents (92%) expect their children to pursue college, and nearly half (48%) expect to pay all or most of the cost. Of the 38% not putting anything aside, many (35%) indicated an assumption that their children would qualify for scholarships while others (34%) admitted they haven’t yet begun to save – and only 33% of those who save do so through a state 529 plan. Most savers (59%) use taxable savings, money-market accounts or certificates of deposit, the study found, ignoring the tax advantages of Coverdell Education Savings Accounts or 529 plans.

The most worrying aspect about saving for college unearthed by various studies, it is said, is that while there is considerable lip service paid to the idea, there's not enough action.