Options on Inherited IRAs

What you can do with an inherited traditional IRA (including SEP-IRAs and SIMPLE IRAs) depends on your relationship to the original account holder, your age and the age of the account holder at death.

Spousal Inheritance

If you inherit your spouse’s IRA, you may assume the assets by transferring them into an IRA in your own name. No matter your age, you won’t have to pay a 10% penalty, and if you’re not already 70½, you won’t have to take any distributions until you reach that age, which means the assets can grow until you need them or until you are required to begin taking distributions.

You may elect to take a lump-sum distribution. Keep in mind that distributions from traditional IRAs are subject to your normal tax rate, and a large lump-sum distribution may easily shift you into a higher tax bracket.

Another option involves transferring your spouse’s IRA assets to an Inherited IRA set up in your name. You can elect to take all of the money at any time within a five-year period (if your spouse was not yet 70½), or you can delay taking distributions until the year in which your spouse would have reached 70½.

Required minimum distributions are determined by your age and the IRS life expectancy tables.

Non-Spousal and Others

Non-spousal beneficiaries may not assume the IRA, but the other options are available: lump-sum distribution or establishing an Inherited IRA with a five-year or life-expectancy distribution plan.

Disclaiming an IRA partially or in full allows the assets to pass to other primary beneficiaries or to secondary beneficiaries. If you are a beneficiary through trust, the lump-sum or five-year/life expectancy options may be available. Estates generally must take the lump-sum or Inherited IRA distribution methods.

Roth IRAs are subject to rules similar to those that apply to traditional IRAs, but some considerations may revolve around the generally tax-free nature of Roth distributions.

Many IRA decisions are irrevocable and time deadlines apply, so it’s wise to consult with qualified tax or legal counsel. If you have any questions, please don’t hesitate to call me.

Health Savings Accounts Spell Value for Some

It’s taken some time, but people are warming up to tax-advantaged health savings accounts (HSAs). After a slow start, more than two million people have signed up for them since they came into existence in January 2004. The law allows investors to build IRA-like nest eggs to pay for current and future medical expenses.

For 2008, an individual (who must be ineligible for Medicare) may contribute up to $2,900 (a family, $5,800) and anyone 55 or older can add a “catch-up” payment of $900 ($1,000 in 2009). Next year’s maximum regular contributions: individual, $3,000; family, $5,950. Contributions are made from pre-tax dollars and account growth is tax-free as are withdrawals, as long as they are used to pay for health-related expenses.

What’s the Catch?

Some might consider the HSA a tax shelter, a kind of healthcare-focused IRA. That wouldn’t be wrong, but there is a catch: only those enrolled in high-deductible health plans (HDHPs) are eligible.

Such plans for 2009 must have a minimum deductible of $1,150 for an individual, $2,300 for a family. Anything less and you’re not eligible. The law permits an annual tax write-off that equals the amount of the deductible of the qualifying healthcare plan. For 2009, those maximums are $5,800 for HDHP individual self-coverage and $11,600 for family coverage.

Eligible individuals or families have an opportunity to save and invest for far more than routine medical expenses. Accounts can grow tax-free for years, so determined savers could build a large account to pay for medical expenses or long-term care in old age.

Some have pointed out that this account, in one way at least, is superior to an IRA in that the money is tax-advantaged going in as well as coming out as long as it is used for health-related expenses.

If you are enrolled in a qualifying insurance plan and would like to explore the value of opening an HSA, please call me.

Financial Planning:
The Long and the Short of It: Supply and Demand

You don’t have to dig deep into economic theory to appreciate that supply and demand for goods and services in an open market are the two ends of the relationship that drive economic movement. Bathing suit prices rise in spring and early summer months, when sunny beaches and warm lakes are most appealing. Retail prices sink when the lakes are frozen and few are imagining life on the beach.

Sometimes investors forget that the same principle applies to stocks. While analysts may think of some compelling reasons why a particular stock’s price may rise or fall, the basic fact is that interest in and demand for the stock is what makes its price rise.

And supply is more or less fixed, at least in the near term, because companies need time to issue more shares of an in-demand stock.

It may be a stocks’ niche within its sector, it may be a particular company’s product, service or reputation, but if you keep the basics in mind while you investigate investment possibilities, you may be able to eliminate the largely irrelevant clatter that almost inevitably surrounds stocks that are in the news.