Maximizing IRAs That Are Inherited by Non-Spousal Beneficiaries

One main difference between an IRA account inherited by a spouse and one inherited by a non-spouse is that the spouse can roll it over into either an existing or a new IRA account and continue contributing to it. If the spousal beneficiary is below the age of 59½, he or she can take funds from the inherited IRA without paying a 10 percent penalty for early withdrawal.

Previously, non-spousal beneficiaries had no other option but to take a lump sum distribution from an inherited account and pay the tax consequences. This is no longer the case. Under the Pension Protection Act, a non-spousal beneficiary can also roll over an inherited account, but only directly (trustee-to-trustee transfer) to a new IRA account. The non-spousal beneficiary will not be subject to taxes on the inherited IRA until he or she receives distributions from the account.

However, the new account cannot be in the non-spousal beneficiary’s name, and the beneficiary cannot make any contributions to the inherited IRA. For instance, the new account could be in the deceased IRA account owner’s name: John Smith, deceased, IRA f/b/o Jane Anderson (beneficiary).


The direct rollover must take place by Dec. 31 following the year of the death of the IRA account holder. However, if the inherited IRA has a stretch option, the rollover can occur anytime after the account owner’s death  - as long as the non-spousal beneficiary took out the required minimum deductions.

In the case of a non-spousal beneficiary, any required minimum distributions made by the deceased owner are deducted from the total amount that may be rolled into the new IRA. If the owner of the IRA died before making the required minimum distributions, the IRS may use either the five-year rule or the life expectancy rule to determine how much must be taken out before rolling the remainder into the new IRA.

The IRS rules that apply to inherited IRAs and rollovers are complicated, and it’s best to consult an accountant or financial planner.


Posted on March 2, 2010 Read More

Why Women Need to Save, Invest More

On average, a woman’s life expectancy is three years longer than a man’s, and 30 percent of women now age 65 can expect to reach age 90. That means women need to save more to fund a longer retirement.

Women are more likely to spend some of their retirement years on their own as they outlive their spouses or because of divorce. This makes retirement more expensive. Almost 40 percent of older women living alone depend on Social Security for almost all their income. If their Social Security benefits were taken away, more than 50 percent of older women living alone would be living in poverty.

Some of the challenges that women face in retirement can be traced back to their working years. Women have less income than men, earning an average of 77 cents for every $1 earned by men. This translates to a loss of more than $300,000 over a lifetime.

Women also spend fewer years working than men. In a 15-year time frame, women spend twice as much time as men outside the work force because they interrupt their careers, says management expert Marcus Buckingham. This leads to lower employer-based retirement plan benefits.


In fact, 50 percent of women workers hold relatively low paying jobs without pensions. Those who do have pension benefits receive just 50 percent of the average pension benefits received by their male counterparts, the Women’s Institute for a Secure Retirement reported.

Because the odds are stacked against women, WISER recommends the following strategy to help address gender-based retirement risk:

Consider a guaranteed source of retirement income that cannot be outlived, such as lifetime annuities.

Delay claiming Social Security benefits to increase the level of both spousal and widow’s benefits.

Purchase long-term care insurance.

Plan for an income stream that will continue in the event of a spouse’s death, through life insurance and joint and survivor annuities.


Posted on February 1, 2010 Read More

What Percent of Income Will You Need for a Comfortable Retirement?

An employee with an income of $50,000 at retirement will need to replace 81 percent of that amount each year to maintain his standard of living, according to the 2008 Replacement Ratio Study conducted by Aon Consulting and Georgia State University.

If an employer earns $150,000 at retirement, he will need to replace 84 percent of that income to sustain his standard of living.

But financial planners say that specific situations will dictate the most suitable figure.

The percentage of retirement income depends on such factors as the quality of the retirement lifestyle, length of retirement, final base salary, marital status, number of children in a household, investment returns, federal taxes, inflation rates, medical care expenses and others.

But some say replacement rates above 70 percent to maintain living standards in retirement is “conceptually flawed.” That’s what University of Wisconsin professors John Karl Scholz and Ananth Seshadri write in “What Replace Rates Should Households Use?”

In the 2009 paper, the authors concluded that the optimal replacement rates could be as low as 23 percent for single parents with several children and a negative late-in-career earnings shock (layoff or big salary decrease). For low-income, married households with a few children and a substantial positive late-in-career earnings shock, the rate can be as high as 240 percent. “Large number of factors will affect optimal target replacement rates,” they concluded.

The bottom line: People need to make detailed and accurate estimates of their retirement spending. This can be done on their own or through online retirement income calculators

Posted on January 1, 2010 Read More

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