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Money And Savvy Don't Always Go Together

admin | 28 November, 2007 13:11

Compliance Watch


Money And Savvy Don't Always Go Together

By Jaime Levy Pessin
A DOW JONES NEWSWIRES COLUMN

NEW YORK -- A new client comes into your office. A 50-something man in the market for financial advice, he just sold his successful business for millions of dollars. Clearly, this guy knows what he's doing.

Not necessarily. Assume the business was a heating and air-conditioning company, or a chain of car washes. A smart businessman doesn't have to be well-versed in investment decisions, and a large amount of wealth doesn't always translate to financial sophistication.

That basic tenet of assessing suitability may have more relevance in a world of baby boomers made newly wealthy by selling their businesses, selling their real estate, inheriting money or cashing out of their savings plans. (A Practice Management column, also published Wednesday, addresses how to serve clients with new wealth.)

From a compliance perspective, it's essential for brokers and advisors to really know their customers -- not just how much they have in the bank, but how they got it and what that means about their financial savvy.

"More people coming out of the workforce... have just put away money every month in their 401(k)s and leave with $2 million to $3 million," said Todd Taylor, managing director in charge of financial advisor recruitment and development at Morgan Stanley (MS). He added that those investors may have invested sums only in the thousands of dollars in the past. "This newfound wealth is a large account by any standard... but sophistication may or may not be there."

Although the Financial Industry Regulatory Authority's suitability rule doesn't name sophistication as a factor that must be considered when brokers recommend investments, it has a broad requirement that brokers "make reasonable efforts to obtain" information that may factor into what's appropriate for a particular customer.

Suitability is always a regulatory concern, but it's become an especially hot topic given regulators' current emphasis on protecting seniors, retirees and those nearing retirement. A broker who misjudges a client's sophistication and comfort level and therefore makes an unsuitable recommendation can find himself in big trouble. FINRA's November disciplinary actions show that it barred one registered representative and fined and suspended another for making unsuitable recommendations.

"It's easy for advisors to assume that because someone has a lot of money that they are more sophisticated," said Craig Rappaport, an author and financial advisor at Janney Montgomery Scott in Radnor, Pa. "It's also easy to assume those people are willing to take extra risk."

Research released this spring by marketing and research consulting firm Harrison Group Inc. and American Express Publishing Corp., a division of American Express Co. (AXP), shows that wealth doesn't necessarily correlate with investment experience.

More than 1,300 people with household discretionary incomes of at least $125,000, or incomes after mortgage and taxes, participated in the late 2006 survey.

Almost 80% of respondents grew up middle class or below and nearly 70% have been wealthy for less than 15 years. About one-third run their own business and one-third run someone else's business.

Sixteen percent of respondents' wealth was earned through financial investments.

That's why it's critical to ask certain questions upon meeting a new client: "Have they invested in securities, mutual funds, different asset classes? How often? Were they the primary decision-makers? All these tests are designed to assess sophistication and suitability," said Andres Vinelli, chief economist at FINRA. "Financial sophistication is very different from being a sophisticated person in general."

Many brokerage firms include these types of questions as part of the basic information customers provide when they open accounts.

At Morgan Stanley, financial advisors are taught to dig deep into their clients' investing experience as part of a "discovery process," Taylor said. They don't just find out how many years the client has been investing, but they gauge the depth of that experience: In the firm's "investor style questionnaire", financial advisors ask clients to say whether they agree or disagree with statements such as "investing intimidates me" or "I follow the stock market on a regular basis."

Beyond that, Taylor said, FAs might ask about a client's best and worst investments in the past, or their previous relationships with advisors.

"It's very important they understand what the clients know and don't know about investments," Taylor said. "As products become more complex and clients' needs become more complex, there are a lot more issues out there for an advisor to uncover... It takes a more thoughtful approach."

Not only will being thoughtful in considering clients' sophistication help advisors build rapport, but it will also help keep them out of regulatory hot water.

"Sophistication and being wealthy are just not one concept," Vinelli said. "Representatives should be attuned to that reality. (There are) pretty intelligent and sophisticated individuals who don't have a clue how to evaluate products on the market."


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News Wire Rappaport Retirement Index

admin | 14 November, 2007 10:14

New Inflation Index For Retirees Released Monthly To Provide Better Financial Planning Replacing The CPI-U As Main Inflation Tool

For several decades, the baby boom generation has been preparing for retirement. The Rappaport Retirement Index is the first inflation index for financial planners, retirees and soon-to-be retirees needing to know how to plan and invest to create and accurately calculate their retirement income needs.

Radnor, PA (PRWEB) November 14, 2007 -- New inflation index for retirees released monthly to provide better financial planning replacing the CPI-U as main inflation tool.

Retirement Specialist and Accredited Wealth Management Advisor H Craig Rappaport, using statistical data and guidance provided by the Bureau of Labor and Statistics, releases the Rappaport Retirement Index.

For several decades, the baby boom generation has been preparing for retirement. The Rappaport Retirement Index is the first inflation index for financial planners, retirees and soon-to-be retirees needing to know how to plan and invest to create and accurately calculate their retirement income needs.

H Craig Rappaport, the author of Live Long Live Rich, understands that A 67 year old will be spending a larger portion of his/her income on healthcare, prescription medication and travel than a 40 year old.

The Department of Labor has gathered inflation data for the elderly and calculated an inflation index for this group for over 20 years but does not release the results. It is called the Consumer Price Index for the Elderly. It is, along with the CPI, not forward looking and therefore inherently flawed for planning purposes. The Rappaport Retirement Index uses the CPI-E data to calculate a forward looking and useful index for real people doing real planning and having to live with the consequences of their actions.

Specializing in retirement, Rappaport has appeared in the Wall Street Journal, Fox News, CNN Headline News, The Dow Jones News Service as well as many television shows, magazines, newspapers and can be heard on the radio daily.

For further information contact: Craig Rappaport at 610-254-1110, via email at Rappaport @ livelongliverich.com or through the website at www.livelongliverich.com.
For the latest index reading visit: www.LiveLongLiveRich.com


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Curbing Drug Expenses Crucial For Seniors

admin | 13 November, 2007 11:22

NEW YORK -- Seniors are discovering that paying for prescription drugs can be a bitter pill to swallow.

Shelling out for prescription drugs is making a sizeable dent in some retirees' nest eggs: one in four middle-income retirees spends $1 out of every $10 of monthly retirement income on medications alone, with many in the dark about how to reduce these expenses, according to a study released Tuesday and commissioned by Medco Health Solutions Inc. (MHS), a pharmacy benefits manager.

And one in three retirees polled said they are spending far more on their health care and prescription drugs than they expected, with more than half saying that they completely overlooked medical expenses -- which are rising much faster than inflation -- when they were planning for their retirement needs.

Fortunately, while it may be too late for retirees to plan, it's not too late for them to act to cut monthly expenses for medications, experts say. Speaking to your physician about less expensive alternatives to your current medication and optimizing doses you take can make a big difference, as can making changes to how you get medications.

And with enrollment in Medicare prescription-drug plans for 2008 about to start, now has never been a more important time for seniors to think about what prescription drugs they take and how much they are likely to cost under different plan options.

"Retirees can save a bundle just by switching from brand name drugs to generic alternatives, which will be every bit as effective and safe," says Sally Greenberg, executive director of the National Consumers League, a consumer advocacy group in Washington.

Savings from switching to generics can run from $2,300 to $5,000 a year depending on the number of prescriptions and types of medication, according to the Consumer Reports Best Buy Drugs research (www.bestbuydrugs.org). That's a lot of money, especially if you are living on a fixed income of $30,000 a year or less, she adds.

Cost-Saving Strategies

There are a number of other strategies retirees can employ to reduce their drug costs, but the problem is that many retirees are either unaware of them or reluctant to use them. That's the main reason why the National Consumer League and Medco are launching a national effort to educate retirees on the importance of actively managing their drug expenses and how to cut their monthly drug costs (www.medicaredadvisor.com).

For example, three out of four retirees polled indicated they were aware of the cost savings benefits of getting their drugs from a mail order pharmacy, but only 40% of retirees said they use this tool to reduce costs.

Woody Eisenberg, chief medical officer of Medco's Retiree Solutions, says the prospect of using mail order can be a little daunting for the elderly, but it's actually quite simple to set up. You just mail in your prescription along with name, address and other details. Once you are set up on the system, the mail order company takes the initiative, and will send you advance reminders about prescription refills and renewals. And the savings can be considerable. For example, you might pay just a few dollars for a 90-day prescription of a generic drug compared with dozens of dollars for the same prescription if you pick it up at a pharmacy. The dollar differential for brand name drugs is even bigger, says Eisenberg.

Optimizing drug doses in consultation with a physician is another strategy that can help seniors save money -- but only 13% of retirees indicated that they were aware they could take fewer pills or capsules at a higher dose in order to reduce the number of pills or capsules they would need to buy.

In addition, when picking a Medicare prescription-drug plan, 40% of respondents said their primary factor for choosing a plan is the price of the premium, while only 15% consider the range of drugs offered.

"By looking just at the premiums, you can be penny wise and pound foolish," says Greenberg. "We encourage seniors to line up their prescriptions, call the plans and ask them what they cover and at what percentage."

The national survey of 1,000 Americans over age 65 was conducted for Medco by Directive Analytics.


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Survey Finds Nest-Egg Confidence Crisis

admin | 12 November, 2007 08:09

NEW YORK -- Many middle-age and older adults in the U.S., Europe and Asia have serious concerns about their preparedness for retirement, but haven't taken action for a variety of reasons, including a lack of confidence in their financial-planning abilities, according to a new survey.

Many people are averse to risk or confused about where to turn for help, according to Hartford Financial Services Group Inc.'s (HIG) second annual retirement survey.

"People age 45 and over across the globe have a fairly clear vision of their retirement. While their aspirations may differ, we found across the board, overwhelmingly, that they are worried they won't have enough money in their retirement," said Liz Zlatkus, co-chief operating officer at Hartford Life, in an interview with Dow Jones Newswires. "Yet, the surprising thing is that few have done anything about it; they are just not confident in their ability to plan for their future."

The Internet survey of adults age 45 and older in the U.S., U.K., Germany, Japan and South Korea was conducted by market-research firm Opinauri this summer and gathered responses form 750 people in each country. It had a margin of error of plus or minus 3.5%.

Concerns about building a sufficient nest egg were widespread, the survey found. Some 79% of respondents in the U.S. indicated at least some level of concern about having enough money in retirement. In Japan, 87% expressed some level of concern, while 66% in the U.K., 69% in Germany and 65% in South Korea had some concerns.

Many people plan to continue working in some capacity when retired, the survey found. In the U.S., for example, 50% of respondents said they plan to work in their current job as long as possible; slow down, but continue working; or start a business or other venture while retired.

Crisis Of Confidence

Despite their concerns, however, many appear to be paralyzed by a crisis of confidence, the survey found. In the U.S., 42% of respondents indicated that they hadn't taken action to improve their financial position for retirement in the past year.

"Even in the U.S. with all the education, with everything we see on the Internet and in the news media, they are still treading water financially in this regard," sad Zlatkus.

But the paralysis appeared to be even more pronounced in both Japan and South Korea, where 70% said they hadn't taken action in the past year, and in Germany and the U.K., where 62% and 51%, respectively, said the same.

"Why such a crisis of confidence?" asks Zlatkus. "This is where we continue to be surprised. Few people have a firm grip on their financial abilities; they don't know where to turn for help, and as a result, they tend to be risk averse." The results show that "there continues to be a very significant need for financial education," she said.

A third of Americans, one in four British and three in 10 Germans said they lack confidence in managing their investments, according to the survey. Some 70% of Japanese and 47% of South Korean respondents said the same.

And in the U.S. and U.K., 41% and 59% of respondents, respectively, said they were risk averse when it comes to investing. But those in South Korea, Japan and Germany were even more risk averse. Some 79% of respondents in South Korea, 69% in Japan and 71% in Germany said they were highly risk averse.

Financial Advice

In addition, many don't appear to know where to turn when it comes to obtaining credible financial advice, and that sentiment has increased since last year, the survey found. Some 27% of respondents in the U.S. said they didn't know where to seek credible advice, up from 19% in 2006. In the U.K., 16% of respondents expressed that sentiment, up from 13% last year. In Japan, 44% didn't know where to find credible advice, up from 38% in 2006, and in South Korea, 35% of respondents said the same.

Some people may turn to friends or relatives for advice, Zlatkus said, while others may look to the media, but it may provide information that is too general for retirement-planning purposes. "We believe that a financial advisor is a good solution," she said.

There is good news.

"People believe that they are responsible for their own retirement finances," Zlatkus said. When asked, "Who is most responsible for their financial success in retirement?" respondents overwhelmingly said themselves, she said. Investors realize that traditional sources of retirement income are drying up and that neither the government nor their employers will provide fully for them, she said.

"What I think is happening is that they're really realizing it, and they're somewhat paralyzed," she said. "They understand they have to do it, but they don't necessarily know how to do it; that's why we think education is so important."


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10 Ways Husbands Can Help Wives Manage Widowhood

admin | 08 November, 2007 14:08

Memo to Bartlett's: Add an asterisk next to Ben Franklin's quote that "death and taxes are the only things we can be sure of."

We also can be sure that husbands will predecease their wives. Well, truth be told, we aren't certain that's the case. But odds are high that wives will outlive their husbands. In fact, 80% of women live longer than their spouses, and often by many years, on average 14, according to the U.S. Census Bureau.

Given those facts, it would seem that husbands would do more to make sure that their wife's transition to widowhood doesn't result in poverty. But that's not the case, according to a report by Boston College's Center for Retirement Research.

Despite the old-age poverty rate being about one-third of its mid-20th century level, the poverty rate for widows remains high. In fact, nearly three in 10 non-married women 65 and older are poor or near poor.

"Of all the factors associated with poverty in old age, the most critical is to be a woman without a husband," according to the Center for Retirement Research report.

That's a big problem, given that nearly 800,000 women become widows each year and that there are more than four times as many widows as widowers in this country, or 11.3 million versus 2.6 million.

Why Are Widows Poor?

"One reason is that widowhood creates economic hardship, as Social Security benefits and pensions from employer-sponsored plans drop," the report says. "In addition, those most likely to be widowed have lower incomes than intact couples even before they lose their husbands. Their lower incomes reflect less education on the part of both the husband and wife and poorer health on the part of the husband than couples that remain intact."

So what should husbands -- assuming they truly love their wives -- do about these certainties?

1. Delay Retirement

The first order of business is to address Social Security and pension benefits. "The most obvious reasons for a decrease in women's income upon widowhood pertain to Social Security and pension benefits," according to the report. "When the husband dies, the couple's Social Security benefit is cut by between one third and one half. The couple's private pension benefit either disappears completely or is reduced."

One way to offset that problem is for the husband and wife to retire later.

"Retiring later may provide for a higher employer pension benefit, if applicable, and offer the opportunity to sock away additional savings for retirement," said Wendy Roy, director of survivor financial counseling services at Ernst & Young, in an email. A higher earnings level can also lead to a higher Social Security benefit.

2. Start A Business Together

In some cases, it might make sense for a husband and wife to start a business together. This enables them to spend time together, but it also gives them a chance to open a company retirement plan, including an individual 401(k) plan, said Jacob Herschler, vice president at Prudential Annuities Marketing.

3. Cover Health-Care Costs

Make sure health-care costs are covered, including Medicare Part B, Medicare Part D and long-term care.

If the husband and wife are still working, they should consider buying long-term-care insurance policies, either through their employers or in the open market, Herschler said. They should especially consider doing so when they are healthy enough to qualify and when they are in their 50s or 60s when the premium costs are lower. In addition, husbands and wives should consider how they will fund health-insurance costs if they retire before becoming eligible for Medicare.

4. Talk Finances

Husband and wife should work as a team on all financial matters of the household, said Paul McClatchy, vice president of financial planning at eMoney Advisor, a unit of Commerce Bancorp, in an email.

"No matter if it includes the household budget, a new car purchase or saving for a future goal; both ought to be involved in the decision-making process," he said. "Too many times one spouse bows out of this responsibility by stating that "they just don't have the head for numbers.'"

It's fine if one spouse is more comfortable with running the household finances, but the other spouse ought to know at least what thought process went into making financial decisions. Most importantly, both spouses ought to know where the important financial documents are kept, including wills, deed to the house, and insurance policies.

Also, there are many good programs couples can use to help with household finances, including Quicken or Microsoft Money.

5. Fund A Spousal IRA

Husbands, if their wives don't work, ought to consider a spousal IRA or Roth IRA for their wives, said Herschler. A nonworking spouse can make a deductible IRA contribution of up to $4,000 for 2007 ($5,000 if age 50 or older as of the end of 2007) as long as the couple files a joint return, and the working spouse has enough earned income to cover the contribution.

6. Delay Taking Social Security

Another way to increase Social Security benefits is to delay taking those benefits. For instance, a husband could increase his Social Security benefit by 5.5% to 8% per year by waiting until age 70. To be sure, couples will need to find ways to replace that income during what's called the "bridge period."

But a recent Prudential Retirement research report presented at the Wharton Pension Research Council symposium suggests that older Americans could withdraw money from their IRAs to replace the Social Security income until it's needed.

The big benefit of delaying Social Security is this: A widow or widower, at full retirement age or older, generally receives 100% of the worker's basic benefit amount, plus the delayed retirement credits, according to the Social Security Administration.

"Social Security has undergone significant changes that make the value of delaying the receipt of Social Security benefits greater than in the past," according to the Prudential Retirement research.

"Specifically, the increase in the full retirement age and delayed retirement credits can result in significantly greater benefits from delaying Social Security.. With the additional benefits of survivor protection, inflation adjustments, low expenses, and customization options available, delaying Social Security (for at least one member of a retiring couple) and taking income from personal retirement savings during the "bridge period" becomes a very efficient strategy of providing retirement income."

7. Consider Buying A Deferred Annuity

A deferred annuity may be worth considering if there's concern that the surviving spouse would have difficulty managing investments to generate the stream of income necessary to support her standard of living, said Ernst & Young's Roy.

Of course, due care would need to be exercised in selecting the appropriate product to insure that it fits appropriately within the couple's larger retirement-planning strategy. It's also important that the spouse understands the product, its benefits and its potential pitfalls.

8. Look At Asset Titles, Beneficiary Designations

Re-titling of assets may reduce the time and cost associated with probate and, if done correctly, could play a role in insuring that each spouse takes advantage of their respective estate tax credit.

An effective estate-planning strategy is best implemented with the assistance of an estate-planning attorney and the couple's financial planner, Roy said.

Also, review beneficiary designations to be certain they accurately reflect current intentions and properly coordinate with will and trust documents.

9. Call In An Expert

Let's face it, some people cannot, do not, and will not try to educate themselves on matters of financial well-being, said McClatchy. The husband must realize this and start working with a financial professional in order to ensure that the surviving spouse will have some financial continuity.

That means the surviving spouse will be able to turn to someone to help guide her on important financial issues. A good advisor will work with clients in categorizing all important documents that spouses will need and additionally will walk the couple through an early death scenario to ensure all bases are covered.

10. Social Network

Spouses should help each other create social networks. Ensure that the widow has a network of knowledgeable and trusted friends to rely upon, said McClatchy. That way, the widow has more than one person to lean on. This network ought to contain individuals familiar with financial concepts; unfortunately some bad financial advice has come from well-meaning but financially ignorant friends, he said.


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Inheriting an IRA or Employer-Sponsored Retirement Plan

admin | 07 November, 2007 14:39


What is it?

When the account owner of a traditional individual retirement account (IRA) or employer-sponsored retirement plan dies, the remaining funds in the account pass to the named beneficiary (or beneficiaries). Unlike many other inherited assets, these IRA or plan funds typically pass directly to the beneficiary without having to go through probate. (Probate is the court-supervised process of administering a will and proving it to be valid.)

These funds are usually subject to federal income tax, unlike some other inherited assets. For federal income tax purposes, post-death distributions from an IRA or plan account are treated the same as distributions that the account owner took during his or her lifetime (state income tax may also apply). In both cases, the portion of a distribution that represents pretax or tax-deductible contributions and investment earnings is taxed, while the portion that represents after-tax or nondeductible contributions is not. The difference, of course, is that the beneficiary is the one who must pay the taxes after the account owner has died. For more information, see Income in Respect of a Decedent.

If you are an IRA or plan beneficiary, you might want to leave inherited funds in the account as long as you like. This would allow you to postpone taxable distributions indefinitely, while maximizing the tax-deferred growth potential of the funds. Unfortunately, you are not allowed to do this. You will generally be required to take distributions of the inherited funds at some point, possibly sooner than you would like. However, you may have more than one option for taking distributions, and the option you choose can be critical.

Caution: While the same general rules apply to inherited Roth IRAs, Roth IRAs are unique in that qualified distributions are free from federal income tax.
Caution: This discussion focuses on the general rules regarding options available to a beneficiary that inherits an IRA or employer-sponsored retirement plan. Your IRA or plan may specify the option(s) available to you.

Beneficiary designations
Primary, secondary, and final beneficiaries

Primary beneficiaries are the IRA owner's or plan participant's first choices to receive the funds. By contrast, secondary beneficiaries (also known as contingent beneficiaries) receive the funds only in the event that all of the primary beneficiaries die or disclaim (i.e., refuse to accept) the funds.


Designated beneficiaries

Designated beneficiaries get preferential income tax treatment after your death. Being named as a primary beneficiary is not necessarily the same as being a designated beneficiary. Designated beneficiaries are individuals (human beings) who (1) are named as beneficiaries in the IRA or plan documents, (2) do not share the same IRA or plan account with another beneficiary who is not an individual, and (3) are still beneficiaries as of the final beneficiary determination date (September 30 of the year following the year of the IRA owner's or plan participant's death--the "September 30 next-year date"). The distinction is important because designated beneficiaries generally have greater and more flexible post-death options.

Tip: Are you a designated beneficiary? The answer depends on who the beneficiaries are on the "September 30 next-year date"--not who the beneficiaries are on the date of death. If you inherited an IRA or plan because the owner or participant named you as sole primary beneficiary, you are almost certainly a designated beneficiary. If you are one of several primary beneficiaries for the same IRA or plan account, you are probably a designated beneficiary if all of the other primary beneficiaries are individuals. However, if any of the other primary beneficiaries are nonindividuals (a charity, for example), you may not be a designated beneficiary. Also, if the IRA or plan funds are coming to you through the owner's or participant's estate, you are probably not a designated beneficiary. If the funds are coming to you from a trust that is receiving the IRA or plan dollars, special rules will apply. Consult a tax or estate planning professional.

Final date for determining beneficiaries

Only beneficiaries remaining on September 30 of the year following the year of the IRA owner's or plan participant's death are considered as possible designated beneficiaries for purposes of post-death distributions from the IRA or plan account.

The September 30 next-year date does two things. First, it allows the IRA owner or plan participant to change beneficiaries any time during his or her lifetime. Second, it creates the opportunity for post-death planning. For example, if an IRA owner dies and the primary beneficiary does not need the money, the primary beneficiary could make a disclaimer up until the September 30 next-year date (note, however, that to be valid for estate and gift tax purposes, a qualified disclaimer--refusal to accept benefits--must be signed by a beneficiary and meet other requirements no later than nine months after a death. Therefore, even though designated beneficiaries are determined on September 30 of the year following the year of a death, a disclaimer may need to be signed much earlier to meet the nine-months-after-death rule). This might allow the funds to pass to a secondary beneficiary with a greater financial need.

Another possibility is that one or more primary beneficiaries could "cash out" their entire share of the inherited funds by the September 30 next-year date. If this is done by the September 30 next-year date, the "cashed out" beneficiaries are not considered as possible designated beneficiaries for purposes of calculating post-death distribution methods. For example, this strategy can be very effective in cases where the primary beneficiaries include both individuals and one or more charities. The charity (ineligible as a designated beneficiary) can take its entire share (income tax free) by the September 30 next-year date, leaving only the individuals as remaining beneficiaries who may qualify as designated beneficiaries.

Caution: 2002 final regulations clarify that a designated beneficiary who dies after the death of the IRA owner or plan participant, but prior to the September 30 next-year determination date, is still treated as a designated beneficiary for purposes of calculating post-death distributions from the IRA or plan account. As discussed above, this is in contrast to situations where a designated beneficiary makes a qualified disclaimer prior to the September 30 next-year date.

Factors that determine post-death distribution options

First, if you have inherited an employer-sponsored retirement plan account, the plan is generally allowed to specify the post-death distribution options available to you. These options may not be as flexible as the options permitted under the final IRS distribution rules. For example, depending on whether a plan participant died before or after his or her required beginning date, some plans may provide a different default payout method than the IRS rules. In such a case, you may not be able to elect another payout method as an alternative to the plan's default method. Your first step should be to consult the retirement plan administrator regarding your post-death options as a beneficiary.

The other factor that determines post-death options is the type of beneficiary. Individual beneficiaries generally have more options and flexibility than nonindividual beneficiaries. For example, post-death options are severely limited if the IRA owner or plan participant dies with his or her estate as a beneficiary. This could occur if the estate is named as a beneficiary, or if there are no named beneficiaries (in which case the estate becomes the "default" beneficiary). The same limited options apply when one or more charities are named as beneficiary. Special rules apply when a trust is named as beneficiary. Under certain conditions, the underlying trust beneficiaries can be treated as the IRA or plan beneficiaries for distribution purposes.

For individuals who qualify as designated beneficiaries, the options available further depend on whether the beneficiary is a spouse or another individual. Depending on plan provisions and other factors, nonspousal individuals will typically have several post-death options. These options generally include using the life expectancy method, receiving a lump-sum distribution, taking distributions under the five-year rule, or disclaiming the funds. (See below for a description of each.) The life expectancy method is usually the default payout method, and often the most favorable method in terms of providing the longest possible payout period (thereby spreading out income taxes and maximizing tax-deferred growth).

A surviving spouse generally has all of the options available to other designated beneficiaries, plus two additional options. A surviving spouse beneficiary can elect to roll over inherited funds to his or her own IRA or plan account, providing income tax and estate planning benefits. A surviving spouse who is the sole beneficiary may also elect to leave the funds in an inherited IRA and treat that IRA as his or her own account. (This option does not apply to inherited retirement plans.) In most cases, it will be in a surviving spouse's best interest to exercise one of the two additional options.

Tip: Nonspouse beneficiaries can not roll over inherited funds to their own IRA or plan. However, the Pension Protection Act of 2006 lets a nonspouse beneficiary make a direct rollover of certain death benefits from an employer-sponsored retirement plan to an inherited IRA. (See Nonspouse rollover to an inherited IRA--The Pension Protection Act of 2006, below.)
Tip: If a participant died before beginning to take required minimum distributions, a surviving spouse can generally wait until the year the participant would have reached age 70

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