Mistake 1: Not seeing a qualified tax or financial advisor before making your decision

Unfortunately, many beneficiaries do not seek a qualified tax or financial advisor and make retirement account decisions on their own or through the use of an unqualified individual or company.

There are a number of different rules that must be followed in order to prevent the IRS from being a primary beneficiary of your retirement account.

Your financial advisor should be competent in all of the different areas of financial planning, especially estate planning, income tax planning and retirement distributions. Please also remember that they should determine whether or not there is any estate tax due on the IRA account. Unfortunately, many people confuse “probate” with estate taxes. Retirement distributions will usually avoid probate, but are always subject to estate taxes. Therefore, please make sure that your advisor reviews this issue as well.

Many advisors may have heard of the Inherited IRA; however, many financial advisors have never established one before! Please ask your advisor/custodian how many Inherited IRAs they have established in the past because if this is the first time they have established one, we all know what happens the first time we do anything! It is called the learning curve. Many of the mistakes that I see are because the financial advisor is not familiar with all of the details and, unfortunately, the client is the “guinea pig.”

Remember the old expression, “We have theory, and then we have the real world.” Please make sure that your advisor understands the “real world.”

Be careful in choosing a custodian. It is often very difficult for custodians to keep up on all the new tax law changes and apply these to their custodial accounts because this is not usually a major priority since the profits on IRA account fees for many custodians is minimal or non-existent.

Your tax or financial advisor should also review your total financial picture before any decision is made because this inheritance can affect your current financial affairs. The financial advisor should review the impact of this inheritance in the following areas:

  1. Income taxes.
  2. Estate plan. You might not have had a large estate and now you do! You might need to have your will or trust updated due to this inheritance.
  3. Estate taxes.
  4. Investments. Your risk tolerance level could be significantly different from that of the individual who just passed away. Please check each of your investments to determine whether or not they are still appropriate.  In most cases you will be able to reposition these assets within the IRA without any income tax consequence.
  5. Cash flow needs. It is very possible that you do not need the entire IRA balance all at once.

Talking through these points with your advisor will help you avoid some of the most common mistakes of inherited IRAs.


Material Adapted from MD Producer