Retire Safe & Tax Free - Missteps With IRA Distributions


It is happening already.

Advisers and their firms and Accountants are being sued for mistakes in handling distributions from IRAs. The lawsuits have come mainly from beneficiaries who relied on incorrect information from their professional Advisers.

Take the case of a couple that called me recently. . .

The husband (Bill) and his two siblings had inherited a $270,000 IRA from their widowed mother, who had bequeathed them equal shares of her account. Bill informed the financial institution or Custodian holding the account that he and his siblings wanted the proceeds split three ways, so that each could manage his own share of the Inherited IRA. The Adviser at the financial institution then cut three checks at $90,000 apiece. That was the fatal blow.

The problem?

The entire distribution was taxable. Bill and his siblings did not to get to "stretch" the inherited IRA because the funds had already been distributed to them with the three checks. Each of the three inherited IRA accounts (beneficiary IRAs) should never have been set up for $90,000 each. Unfortunately, once the check is cut to a non-spouse beneficiary, the amount is fully taxable.

Bill was 32 years old in 2003. According to the IRS Single Life Expectancy Table, he could have extended his $90,000 over 51.34 years. So in the first year, he would only have to withdraw 1.95% of the $90,000 or $1,750.98. Instead of paying tax on $90,000, he would have to pay tax only on $1,750.98. The rest could have remained in a properly set up inherited IRA, from which Bill would have to withdraw only a small amount each year, allowing the account to grow over the next half century. Instead, the inheritance was fully taxed before it had an opportunity to blossom.

Now Bill was experiencing shock and awe. . .

He asked, "Is there anything that can be done to correct this situation?" I had to tell him no. He then asked, "Couldn't I get the Custodian to put the money back in Mom's IRA and start over the right way?" Again, the answer was no. Once the money goes to a non-spouse beneficiary, the tax law prohibits the child from rolling the money over to any other IRA to keep it growing tax deferred. The "stretch" option was lost to Bill and his siblings forever.

Bill and his siblings are now suing their Adviser and Accountant for $2 Million. . .

They feel that this is the amount their combined inherited IRAs could have grown to over their lives if their Adviser and Accountant had set up the inherited IRAs correctly. This case will probably be settled out of court. Notwithstanding, the amounts of these settlements are usually not revealed publicly. The best defense against this type of exposure is knowing the rules in the first place.

Marc H. Weiss, Archer Weiss Insurance & Financial Services, Inc. Please Call Toll free: 1-800-831-2901 or (818) 610-8560