An Inherited IRA

AN INHERITED IRA

Here are some things to consider.

Presented by Kip A. Hoover

Be sure you understand your options. When the owner of an IRA passes away, his or her heirs must be aware of the rules and regulations affecting the inherited IRA. Ignorance could lead you straight toward a tax disaster.

Please note that this is simply an overview. Rather than use this article as a guide, use it as a prelude before you talk to a financial services professional well-versed in IRA rules and regulations.

First, make sure you have actually inherited the IRA. Your spouse, parent or grandparent may have left their traditional or Roth IRA to you in a will, but that doesn’t mean you have inherited it. In all but rare cases, an IRA beneficiary designation form takes precedence over any bequest made in a will or living trust. (The same thing applies with annuities and life insurance policies.)¹

So your first financial task is to find that beneficiary form.

• What if I can’t find the form? The financial firm serving as the custodian of the IRA assets will usually have a copy. (If the IRA was opened decades ago, it may not.)

• What if there is no beneficiary designated on the form? Then the financial firm supervising the IRA will choose a beneficiary according to its rules and/or IRS guidelines. It may decide that the decedent’s estate will be the beneficiary of the IRA, which is often the poorest outcome in terms of taxation.¹

• What if I’m not the beneficiary named on the form? The IRA assets are destined to go to whoever the named beneficiary is. If the named beneficiary is deceased, the IRA assets will be inherited by the contingent beneficiary (if one has been named).

Ideally, the original IRA owner has told you where (or left instructions where) to find the form.

                                                                                             

Understand the rules for spousal and non-spousal heirs. If your husband or wife has passed and you are the named beneficiary of his or her Roth or traditional IRA, you have three options.

• You can roll over the assets into a beneficiary IRA. This enables you to withdraw money from the IRA based upon your own life expectancy – and you can wait until the year in which the original IRA owner would have turned 70½ to start taking required withdrawals from the IRA.²
• You can convert the inherited IRA into your own IRA. If you don’t have an IRA, you can create one for this purpose. This gives you the ability to name your own beneficiary, and it also allows you to keep contributing to the account and put off required minimum distributions (RMDs) until you turn 70½.²
• You can “disclaim” all or some of the inherited IRA assets. If you don’t want or need the money from the inherited IRA, here is another option. By doing this, the income distribution off the IRA can go to the contingent (or successor) beneficiary. Spousal IRA heirs sometimes do this with the goal of reducing income and estate taxes.³
• If the inherited IRA is a Roth IRA, the surviving spouse may not have to wait so long to get tax-free income distributions off the earnings. While the original contributions to a Roth IRA can always be withdrawn tax-free and penalty-free, a Roth IRA owner must wait 5 years to avoid income tax on any earnings withdrawn from the account. However, a surviving spouse who inherits a Roth IRA can receive “credit” toward this 5-year waiting period for the years that the deceased spouse owned the IRA. The waiting period ends either a) 5 years after the deceased spouse opened the account or b) 5 years after the surviving spouse has opened his or her own Roth IRA.⁴

Non-spousal heirs often get little or no guidance when it comes to inherited IRAs. Too often, the financial firm overseeing the IRA just asks, “What do you want to do?” Often the IRA heir doesn’t know what to do.

·         Ask the financial firm to help you retitle the inherited IRA. This will enable you to arrange a direct rollover of the inherited IRA assets from the original IRA owner’s financial custodian to the financial firm that serves as the custodian of your investments. This has to be done by September 30 of the year following the year in which the original IRA owner passed away. This is also a necessary move to “stretch” the IRA assets. Usually the new title for the IRA is something like “Mary Jones IRA/Deceased 4/8/2010/ FBO (for the benefit of) Thomas Jones as beneficiary.” This retitling signifies to the IRS that this is an inherited IRA.⁵

·         You should be made aware of the consequences if you don’t retitle the inherited IRA. Let’s say you don’t retitle the inherited IRA as above. Instead, you just withdraw the assets from the inherited IRA and deposit them an IRA you have held for some years now. If you do this, the entire inherited IRA balance will be treated as taxable income and your federal tax bill could be huge.⁵

·         You should be made aware that you can name a beneficiary. All IRA owners and IRA heirs have a right to do this. No named beneficiary, no stretch IRA.

·         If you weren’t married to the original IRA owner, you should be told some inherited IRA basics. Non-spousal heirs of IRAs can’t contribute to an inherited IRA and can’t put off required minimum withdrawals from an inherited IRA.⁵

·         You don’t necessarily have to take a lump sum when it comes to withdrawing the IRA assets. This is one way inherited IRAs are quickly depleted. A beneficiary can arrange to make smaller required minimum distributions (RMDs) from the inherited IRA according to his or her life expectancy. These withdrawals must start by the end of the year following the year in which the original IRA owner passed away. If you don’t start taking these required withdrawals by December 31 of the following year, you will pay a penalty. Taking smaller withdrawals allows some of the IRA assets to stay invested with tax deferral, and it spreads the income tax liability on the inherited IRA money over a multi-year period.^4,5

·         You may be eligible for a big tax deduction related to income distribution off the IRA. Income from an inherited IRA is what the IRS terms “income in respect of a decedent”. This means you can take an income tax deduction for the portion of the estate tax attributable to the inherited IRA (this is detailed in IRS Publication 590).⁶

·         If multiple beneficiaries are inheriting the IRA, you should be informed that you might be able to split the IRA up. When multiple beneficiaries inherited an IRA years ago, they had to share it and make joint investment and withdrawal decisions. Now it is possible to divide an inherited Roth or traditional IRA into multiple IRAs, one for each beneficiary. (Ask the IRA custodian if it will allow this.)⁴

So if you inherit an IRA, read up on the rules. Knowledge is truly an asset when you inherit sizable funds from any kind of retirement account. The more informed you are and the more guidance you have, the better the potential outcome.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com

www.teichmanfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 investopedia.com/articles/pf/07/beneficiary_form.asp [3/23/11]

2 jhrollover.com/article_beneficiary_basics_final.shtml [3/23/11]

3 investopedia.com/articles/retirement/03/041603.asp [4/16/03]

4 online.wsj.com/article/SB125634328917505043.html [10/24/09]

5 online.wsj.com/article/SB125512471450876777.html [10/10/09]

6 irs.gov/publications/p590/ch01.html [2011]

7 montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [3/27/11]

Impact Investing (Socially Responsible Investing)

IMPACT INVESTING (SOCIALLY RESPONSIBLE INVESTING)

Allocating your assets with the goal of helping the world … and your portfolio.

Provided by Kip A. Hoover

“Do well by doing good.” You’ve probably heard that phrase. In the financial arena, it is often written or spoken in reference to impact investing – also known as socially responsible investing.

A chance to be an activist. Maybe you don’t think of yourself as an activist – you don’t take to the streets, you don’t have the time or energy to get involved on the ground in social or political causes. Well, many investors around the world are choosing to be economic activists through socially responsible investing.

The fact is, sometimes a corporation or a big business can generate large-scale environmental or social returns for a community or a region – an impact that many non-profit organizations would be hard-pressed to match. Socially responsible investing means allocating some of your investment assets across private sector change agents working for sustainability.

The demand is there and financial firms are noticing it. Many investors want to affirm sustainability through their portfolio choices. The fund companies must meet an interesting challenge as they seek to serve this expanding investor niche.

On one hand, it would seem appealing to allocate X percent of one’s assets to an emerging market fund dedicated to impact investing. You could help the emerging economy of a nation or a region with a growing middle class, and essentially cast your vote in a certain economic direction. On the other hand, many emerging market economies have lax environmental and labor regulations and poor track records when it comes to human rights - and mutual fund companies are hardly lobbyists.

Still, as of January 2011 there were 166 impact investing funds available – more than twice the selection found in 2001.¹

Social returns aside … what about investment returns? A few years ago, impact investing was getting a bad rap. The word on the street (Wall Street) was that your fund choices were limited and performance was nothing to write home about. Well, is that true today?

It doesn’t appear to be. SRI funds appear to be holding their own in the market The KLD 400 Social Index – pretty much regarded as the benchmark index for socially responsible investing – posted a 1.1% price return across the past five years compared to 1.0% for the S&P 500. Some individual fund returns have been very impressive.

Who sets the screens? Who determines whether or not companies meet a socially responsible fund’s criteria? Sometimes that is left up to private third-party research firms consulting the fund. This may mean that some companies you might think twice about make the cut, as their criteria could differ from yours. So you want to keep checking what you own.

You also want to see that the funds are really walking the walk. The Social Investment Forum (a Washington, D.C.-based membership organization for financial services industry firms and professionals committed to impact investing) says that just 27% of socially responsible mutual funds file shareholder resolutions or actively call for change at the companies they own. SmartMoney looked at 20 big socially responsible mutual funds and discovered that 10 had invested in oil companies.¹

Consider green investing in pursuit of a triple return. Look into some of these funds and you will likely find one (or two, or more) that may meet your personal environmental, social and governance standards. Over time, they may create financial, social and environmental returns.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

http://www.teichmanfinancial.com/

Mutual funds are offered with a prospectus.  Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing.  The prospectus contains this and other information about the investment company.  You can obtain a prospectus from your financial representative.  Read the prospectus carefully before investing.

Investing in mutual funds are subject to the risks of their underlying investment holdings including possible loss of principle. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.

The FTSE KLD 400 Social Index (KLD400) is a float-adjusted, market capitalization-weighted, common stock index of U.S. equities and is the first benchmark index constructed using environmental, social and governance (ESG) factors.   It is a widely recognized benchmark for measuring the impact of social and environmental screening on investment portfolios.

Investors cannot invest directly into an index, and though they may display past performance, cannot be considered indicative of future results.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 –smartmoney.com/investing/mutual-funds/what-you-need-to-know-about-socially-responsible-mutual-funds-1294427152167/ [1/11/11]

2 – post-gazette.com/pg/10075/1043010-334.stm [3/16/10]

3 – montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [1/29/11]

IRA DEADLINES ARE APPROACHING

IRA DEADLINES ARE APPROACHING

April is nearly here. Keep your IRA in mind.

Presented by Kip A. Hoover

Many of us associate April with taxes. We should also associate it with IRAs, for April is the month with the deadlines for IRA contributions and mandatory IRA withdrawals.

The deadline for your 2010 IRA contribution is April 18, 2011. Yes, April 18. This year, April 15 falls on a holiday in the District of Columbia (Emancipation Day). So you get a little extra time to make your 2010 contribution if you (still) haven’t done so.¹

For tax years 2010 and 2011, you can contribute up to $5,000 to your IRA. If you have multiple IRAs, you can contribute up to a total of $5,000 across the various accounts. (If you earn a lot of money, your maximum contribution to a Roth IRA may be reduced because of MAGI phase-outs.)²

If you turned 50 in 2010, your IRA contribution limit for 2010 is $6,000. If you will celebrate your 50th birthday during 2011, your 2011 contribution limit is $6,000.^2,3

You get 15½ months to make your IRA contribution for a given tax year. You can make your 2011 IRA contribution at any time until April 15, 2012.³

Have you already made your IRA contributions for 2010 and/or 2011? Good for you. Hopefully, you contribute the maximum annually and make your contribution at the start of the year. The earlier that money is invested, the longer it can work for you.

Be sure to indicate the year of the IRA contribution on the check. This seems pretty basic, yet is too often overlooked. Write “2010 IRA contribution” or “2011 IRA contribution” or something equally simple and clear on your check (and include your account number on the check to help your IRA custodian). If you’re making your contribution electronically, be sure this gets communicated.

If you don’t tell your IRA custodian what year the contribution is for, it will be accepted as an IRA contribution for the current year per IRS guidelines.¹

Avoid racing against the clock. If you wait until the last minute, you may feel safe mailing your 2010 IRA contribution check to your IRA custodian with an April 18, 2011 postmark. That feeling might be unwarranted. Postmark deadlines for prior-year contributions vary among IRA custodians, and sometimes checks that arrive after the deadline count as current-year contributions regardless of postmark. Why not save yourself the risk and mail your 2010 contribution in with plenty of time to spare? ¹

The recharacterization deadline for Roth IRA conversions is April 18. If you converted a traditional IRA to a Roth IRA last year and need to undo it for tax purposes, April 18 is the deadline to “recharacterize” the Roth account. If you need to do this, please request a recharacterization with your IRA custodian well before April 18. If needed, you can file for an extension on this, which will give you until October 17, 2011 to accomplish your objective.⁴

The RMD deadline is April 1. If you turned 70½ in 2010, you have until April 1 of this year to take your first Required Minimum Distribution from your traditional IRA – that is, your first mandatory income withdrawal. Your IRA custodian should have notified you of this deadline at the end of January, and many IRA custodians have online calculators or similar tools that will help you figure out the RMD amount. Many IRA owners just let their account custodians calculate the annual RMD for them. Of course, if you have a Roth IRA, you aren’t ever required to take an RMD and you can still keep contributing to it after age 70½.⁵

Keep the deadlines in mind – April will be here before you know it.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

www.teichmanfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 - boston.com/business/personalfinance/managingyourmoney/archives/2011/03/its_crunch_seas.html [3/10/11]

2 - irs.gov/retirement/participant/article/0,,id=188232,00.html [11/1/10]

3 - irs.gov/retirement/article/0,,id=202510,00.html [11/1/10]

4 - kiplinger.com/features/archives/maximize-your-tax-refund.html [3/7/11]

5 - personal.fidelity.com/planning/retirement/retiree/content/mrdlearn.shtml [3/11/11]

6 - montoyaregistry.com/Financial-Market.aspx?financial-market=do-you-have-a-plan-for-your-ira-distributions&category=1 [3/13/11]

The Return to Large Caps

The Return to Large Caps

Why these stocks are looking attractive again to high net worth investors.

Presented by Kip A. Hoover

Large caps have kept up with small caps this year. 2010 was a great year for small stocks – the Russell 2000 advanced 25.31% while the S&P 500 returned 12.78% (15.06% including dividends). This year, the story may be different: when the market closed on March 4, the Russell 2000 was +5.28% YTD and the S&P 500 +5.05% YTD.^1,2,3,4

The 4Q earnings on the large caps were very encouraging. In fact, companies in the S&P 500 have beaten 4Q earnings estimates by an average of 7.3%. Firms in the S&P SmallCap 600 Index have beaten their earnings estimates by an average of 4.9%.⁵

Investors are taking notice. Data from Morningstar Inc. shows a January inflow of $5.2 billion into mutual funds investing in the biggest U.S. companies. Compare that to an outflow of $13 billion in December 2010.⁶

In February, the Spectrem Group (a financial services industry consulting firm) took a survey and found that a majority of the respondents with investable assets in the range of $5-$25 million said they would probably buy stocks this year. That doesn’t sound like 2010, when investors pulled more than $77 billion out of large-cap funds.⁶

Are these stocks overdue? That is what some Wall Street strategists think, looking at small-cap valuation versus large-cap valuation. On February 23, the Russell 2000 had a price-earnings ratio of 31 while the S&P 100 had a P-E ratio of 14. At the close on March 4, the forward P-E ratio for the Russell was rounding up to 22, while the forward P-E ratio for the S&P 500 was below 14.^6,7

This year, we have seen something of a selloff in the emerging markets thanks to China raising interest rates and other factors (a popular barometer, the MSCI Emerging Markets Index, was down 1.78% YTD as of March 4). These developments may be attracting investors back to large caps, and to some investors who have watched the stock market for decades, some of the large caps may appear as cheap as they are ever going to get, or close.⁸

A “great rotation” may be taking place. Even with unrest in the Middle East adding volatility on Wall Street and attracting investors toward hard assets, a trend may be underway. Bank of America Merrill Lynch analysts have termed it "The Great Rotation" - a global movement away from certain commodities, bonds, money market funds and emerging market stocks toward developed-market large cap equities that may benefit from "a normalization of economic growth, interest rates and asset allocation." Perhaps the large caps will take the lead in 2011.⁹

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

www.teichmanfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

General risks inherent to investments in stocks include the fluctuation of market prices and dividend, loss of principal, market price at sell may be more or less than initial cost.

Stocks of small companies involve greater risk than securities of larger, more established companies, as they may have limited markets and may be exposed to more erratic and abrupt market movements.

Citations.

1 - cnbc.com/id/40865401 [12/31/10]

2 - spdrs.com/product/fund.seam?ticker=spy [12/31/10]

3 - money.cnn.com/data/markets/sandp/ [3/4/11]

4 - money.cnn.com/quote/quote.html?symb=RUT [3/4/11]

5 - bloomberg.com/news/2011-02-07/large-caps-to-outperform-as-economy-recovers-oppenheimer-says.html [2/7/11]

6 - investmentnews.com/article/20110224/FREE/110229970 [2/24/11]

7 - online.wsj.com/mdc/public/page/2_3021-peyield.html [3/4/11]

8 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [3/4/11]

9 - heraldnet.com/article/20110222/BIZ/702229957/1005 [2/22/11]

10 - Financial-Market.aspx?financial-market=financial-planning-where-do-you-begin&category=5 [3/6/11]

Should You Pay Off Your Home Before You Retire?

SHOULD YOU PAY OFF YOUR HOME BEFORE YOU RETIRE?

Before you make any extra mortgage payments, consider some factors.

Presented by Kip A. Hoover

Should you own your home free and clear before you retire? At first glance, the answer would seem to be “absolutely, if at all possible.” Retiring with less debt … isn’t that a good thing? Why not make a few extra mortgage payments to get the job done?

In reality, things are not so cut and dried. There is a fundamental opportunity cost to consider. If you decide to put more money toward your mortgage, what could that money potentially do for you if you were to direct it elsewhere?

In a nutshell, the question is: should you pay down low-interest debt, or should you invest the money into a tax-advantaged account that could potentially bring you a strong return? 

Relatively speaking, home loans are cheap debt. Compare the interest rate on your mortgage to the one on your credit card. Should you focus your attention on a debt with 6% interest or a debt with 15% interest?

You can usually deduct mortgage interest, so if your home loan carries a 6% interest rate, your after-tax borrowing rate could end up being 5% or lower.

If history is any barometer, your home’s value may increase over time and inflation will effectively reduce the real amount of your mortgage over time.

A Chicago Fed study called mortgage prepayments “the wrong choice”. In 2006, the Federal Reserve Bank of Chicago presented a white paper from three of its economists titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings”. The study observed that 16% of American households with conventional 30-year home loans were making “discretionary prepayments” on their mortgages each year – that is, payments beyond their regular mortgage obligations. The authors concluded that almost 40% of these borrowers were "making the wrong choice." The white paper argued that the same households could get a mean benefit of 11-17¢ more per dollar by reallocating the money used for those extra mortgage payments into a tax-deferred retirement account.¹

Other possibilities for the money. Let’s talk taxes. You save taxes on each dollar you direct into IRAs, 401(k)s and other tax-deferred investment vehicles. Those invested dollars have the chance for tax-free growth. If you are like a lot of people, you may enter a lower tax bracket in retirement, so your taxable income and federal tax rate could be lower when you withdraw the money out of that account.

Another potential benefit of directing more funds toward your 401(k): If the company you work for provides an employer match, then you may be able to collect more of what is often dubbed “free money”.

Let’s turn from tax-deferred retirement investing altogether and consider insurance and college planning. Many families are underinsured and the money for extra mortgage payments could optionally be directed toward long term care insurance or disability coverage. If you’ve only recently started to build a college fund, putting the assets into that fund may be preferable.

Let’s also remember that money you keep outside the mortgage is money that is easier to access.

What if you owe more than your house is worth? Prepaying an underwater mortgage may seem like folly to you – or maybe you really love the house and are in it for the long run. Even so, you could reallocate money that could be used for the home loan toward an emergency fund, or insurance, or some account with the potential for tax-deferred growth – when all the factors are weighed, it might look like the better move.

Think it over. It really comes down to what you believe. If you are bearish, then you may lean toward paying off your mortgage before you retire. There is no doubt about it - when you pay off debt you owe, you effectively get an instant return on your money for every dollar. If you are tantalizingly close to paying off your house, then you may just want to go ahead and do it because you love being free and clear.

On the other hand, model scenarios may tell you another story. After the numbers are run, you may want to direct the money to other financial priorities and opportunities, especially if you tend to be bullish and think the market will perform along the lines of its long-term historical averages.

No one path is right for everyone. If you’re unsure which direction may be most beneficial to you, speak with a qualified Financial Professional.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com.

www.teichmanfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_05.pdf [8/06]

2 montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [2/27/11]