Recently I had my first experience with a full service broker. I was not the client, only a relative of the client, and the broker opened an account for me. I thought that was illegal. I didn't want the account, so I called the number on the letterhead when they sent an account verification form, and got it closed. I was grateful that I had been able to read up on this particular brokerage online, because otherwise I would not have known that this particular investment house charges $300 to close an account. I was not charged the closure fee, perhaps because I closed the account early enough and it had zero balance. You never quite know if the advice you find in a discussion forum is accurate. Anyway, I wanted to pass on this experience, ask for other experiences people have had with full service brokers, both good and bad. This particular broker has been hugely helpful to my relative, so I have a very mixed impression. Sometimes people need assistance with their finances, and a full-service broker can provide that. It is very expensive, however. I don't ever want to do business with them because I think it's smarter to keep your finances simple enough to manage them yourself. That avoids all kinds of pitfalls. I suspect the account was opened so that it could be used for a Transfer on Death agreement, as an inheritance mechanism. That sounds good, so far as it goes, but it can be very bad too. I read that an inherited IRA may be transferred only once. So the Transfer on Death agreement drawn up by the broker would have forced me to become a customer of their firm, years from now, for probably a decade, because that's the normal life of an inherited IRA. Maybe I should use the "Ask the Expert" part of this site to confirm the rules for inherited IRAs. The restrictions on inherited IRA rollovers are a real trap, not something most of us would learn about until it's too late. If we discuss them in this forum, we might save one of our forum members from that trap.
Thank you for sharing your story using a full service broker. We can and will pass along your comment to our Experts for their input. Stay tuned as one of our experts will respond with suggestions on inherited IRAs.
I have some “good news” about inherited IRAs that may make you feel better about the situation.
The rule about one-time limits on transfers that you cite refers to the transfer from the original owner of the IRA to the person who is inheriting it. So if your older sister names you as the beneficiary on her IRA you cannot then turn around and pass those assets along to someone else. The transfer ends with you. However, once you have inherited the IRA, you are free to move it from custodian to custodian or from financial advisor to financial advisor.
That said, there are several other limitations about inherited IRAs that you will want to be aware of:
These rules can feel a bit complex because they span three areas of personal finance - investing, income taxes, and estate planning. As such, it is very important to consult with your tax professional upon receipt of an inherited IRA to make sure you are following the appropriate tax rules.
Thank you for investigating the rules relating to inherited IRAs for me. Did you also find that you can't get a check and then deposit it into an IRA within 60 days, as you can for most other IRAs? I have read other places that the transfer must be custodian to custodian. The transfer cannot be made into any old IRA, it has to be kept separate, named with the original owner's name, something like "IRA inherited from Margaret Jones". Also, I found that the RMDs start immediately, which could be long before you reach retirement age.
I noticed you didn't get an answer to these follow-up questions. I'm not an expert, but have worked in the F/S industry in operations (translation: filling out forms [LOL!]), and over the last six years have helped my DH with his mother's legal/financial affairs, including her recent death.
An Inherited IRA is separated into two classes: Spouse and Non-spouse. A spouse is the only heir who can roll an inh-IRA into his/her own account. Non-spouses CANNOT do this. An non-spousal inh-IRA must always be kept separate from your own personal retirement funds. Yes, it must be titled with the original owner's name and specified as an Inherited IRA. The IRS is very, very sticky about this rule. Get one word wrong in the full title and it will be disqualified as an Inh-IRA.
Also yes, transfer must be from Custodian to Custodian. Many people split up their IRA between several beneficiaries, such as a wife and children or among children. The paper trail for the IRS is neater and clearer if the Inh-IRA goes from institution to institution via EFT (electronic funds transfer thru the Fed). No chance for excuses like, "the check got lost in the mail" or "oh, I forgot to cash it and it's been sitting here for 18 months, so I didn't really 'have' the money".
Once the Inh-IRA is set up for the non-spousal beneficiary(ies), she/he/they can decide what to do with the $$$. The new owner can decide to take a lump sum distribution, which will trigger the normal income taxes. So if an inh-IRA was split between two children, for example; one may decide to keep his share intact while the second may chose to liquidate and pay the total income tax now.
The restriction on non-spousal Inh-IRA distributions is simple:
- IF the original IRA owner was taking distributions, whether early (rule of 59-1/2) withdrawals or a mandatory RMD, then any heirs MUST continue taking distributions. The RMD amount is re-calculated at the new owner's age. Note that if distributions are mandatory, and if there is more than one heir to the IRA, the age used to calculate the RMD amount is the eldest heir's age. So if the IRA is split between a 60-yr old wife and a 25-yr old son, this is a disadvantage for the younger heir. But that's the law, no way around it.
Side note: do not delay taking the first RMD, if you want to "stretch" the inh-IRA. You have to take out your 1st distribution in the next calendar year by Dec. 31 of the calendar year following the year that the decedent died. If you miss that date, you default back to the 5-year rule, which states the IRA must be liquidated within 5 yrs, incurring a possibly larger income tax.
- If NO distributions were being taken, then the inh-IRA is simply another IRA - kept separately by title, but subject to the new owner's decisions on distributions. If you wish to keep it intact until age 70 to take advantage of compounding investment returns, you can do so. If you wish to start taking early at age 59-1/2, you can do that too. It's just another Individual IRA, but in an additional, separate account. In this case, remember that if you wait until age 70, RMDs should be calculated from all IRA accts (talk to your advisor about exactly how this is handled to comply with current IRS regs). The IRS has changed these regs recently, and they can change them again so it's always best to get up-to-date advice. And GET that advice within a few months of inheriting that IRA!
If you don't work with a full service brokerage - who are just salespeople, I hope you realize - then find either a good tax advisor, or an independent Certified Financial Planner, through NAPFA or the Garrett Network. Pay for a couple of hours' consultation; it will be well worth it to avoid making a mistake that can't be easily corrected!
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