Inherited IRA and Vanguard

[kannon]

Evening -

I read a good book recently by Ed Slott on IRAs. Was hoping to get real world experiences from those on this blog.

Basically my wife and I each have traditional and Roth IRAs. Financially it looks like we will not need to tap into them before RMD time. We probably won't need the RMD for living expenses.

Our ultimate goal is to allow our two children to inherit our IRAs in the best financially means possible so as the funds can continue to grow as best as can be.

Was hoping for anyone on this blog who has dealt with IRAs at Vanguard and how they set them up (e.g., beneficiary titling,...) so they could be inherited by their children.

Also - in his book, Ed Slott advises getting a life insurance policy (hefty price for sure of those of us in our 60s) paid via our taxable funds so that the life insurance can pay for any of the RMD taxes (so none of the inherited IRA assets need to be taken out, except for RMD). Has anyone done this??

Thank you much for any feedback.

Kannon

 

[LOL!]

Ed Slott's books are out of date. He also pretty much writes for the ultra-wealthy and not folks who typically post at early-retirement.org. The Slott book I read had terrible advice for me, so I ignored it.

We have inherited IRAs. My wife's inherited IRA is held at Vanguard. The primary beneficiary is me and the secondary beneficiaries are our children. I don't see any problems with that. That's the way our regular traditional/rollover IRAs and Roth IRAs are set up, too.

I would not do the life insurance thing that Ed Slott wrote about because the RMD taxes would be so low as to not be worth it. Have you calculated the possible RMD taxes? I suggest that you do. I think Slott is writing about inheriting a $400 million+ IRA or something.

Also note that if your children inherit Roth IRAs, they won't pay any taxes on the RMDs. It is up to you to do Roth conversions if you can in order to save your beneficiaries taxes if that's what you want to do.

 

[kannon]

Did you specify in Vanguard's website Account Maintenance that your spouse was primary and kids were secondary using the "To my descendants who survive me, per stirpes" statement or should I put specific names and %? According to the book you have to make sure you have a "designated beneficiary" in order to work a stretch IRA.

 

[LOL!]

We don't use "per stirpes", but have always put specific names and percentages. That may change if our kids get married.

 

[Souschef]

I have an IRA with Morgan Stanley, and have my 2 sons as beneficiaries. The each will get 50 % of the IRA. They will have to take the RMD based on their age in the table, but the number is small, compared to the RMD at age 70. I would certainly not get life insurance to cover it.
As an example, if the beneficiary is age 51 at the time of parent's death, the RMD is only 3%. On a $500 K IRA, that is only $15 K, which the IRA can certainly afford. The RMD can be taken as cash, or moved to a taxable account. I have done this both for myself and my wife, but it also works for an inherited IRA
Here is the lowdown:[FONT=&quot][/FONT][FONT=&quot]
[/FONT] [FONT=&quot]Generally, a non-spouse beneficiary of either a Traditional or the entire account as a lump sum or begin taking required minimum distributions (RMDs) each year from the Inherited IRA beginning in the year following the owner's death (he or she can always take more). In the latter case, the annual RMD amount usually is based on the beneficiary's life expectancy (according to IRS Life Expectancy tables). The younger the beneficiary, the smaller the initial required withdrawal amount will be as a percentage of each prior year-end Inherited IRA balance. An additional five-year distribution option is available to beneficiaries of owners who died before achieving their required beginning dates.[/FONT]
[FONT=&quot]As an example, based on the life expectancy of the beneficiary, RMD amounts are calculated as follows: In the calendar year following the year in which the owner dies, the beneficiary should consult the applicable IRS Single Life Expectancy table (available at irs.gov) and identify the factor that corresponds with the age he or she will turn that year. The beneficiary then takes the balance of the Inherited IRA as of December 31 of the prior calendar year and divides the dollar amount by the factor from the IRS table. The result is the minimum amount that beneficiary is required to withdraw from the Inherited IRA by December 31 of that year. (He or she always can withdraw more.) For subsequent years, the beneficiary should repeat the RMD calculation using the original life expectancy factor minus one each year. (There is no need to go to the table for a new factor.) Any beneficiaries of the Inherited IRA after the first beneficiary could continue to use the RMD calculation factor based on the life expectancy of the original Inherited IRA owner—again subtracting one from that factor for each year thereafter[/FONT]

 

[SecondCor521]

Did you specify in Vanguard's website Account Maintenance that your spouse was primary and kids were secondary using the "To my descendants who survive me, per stirpes" statement or should I put specific names and %? According to the book you have to make sure you have a "designated beneficiary" in order to work a stretch IRA.

My Mom was very interested in stretch IRAs so she made very sure that she and my Dad did everything correctly.

My Mom passed away about two years ago and my Dad moved her IRA into his.

He has his beneficiaries of both his traditional and Roth IRAs at Vanguard set up as follows:

"[Oldest child's name] per stirpes 33.34%"
"[Middle child's name] per stirpes 33.33%"
"[secondcor521] per stirpes 33.33%"

Mainly he wants to divide everything equally between his three kids. The above does that (albeit my oldest sister gets an extra 0.01% due to the way fractions and Vanguard's website work - not an issue obviously).

In the off chance that any of his kids predecease him, he confirmed that he wanted that portion of his IRAs to go to the predeceased child's children, so the above accomplishes that also.

The other thing, which is sort of obscure, is that if I wanted to, I could partially disclaim either or both or a portion of either or both of my portion of his IRAs. That disclaimer would have the effect of passing the disclaimed portions to my children, and they would be able to do a stretch IRA over their lifetimes. This is an option I probably won't exercise simply because it complicates things financially, but it's an option the way things are worded.

...

Note that there are other requirements to successfully execute a stretch IRA. The main other requirement I can recall is that the IRA must be divided among the beneficiaries with a certain amount of time after death (September of the year following or something like that). There may be others, so make sure your heirs are aware of the requirements if it's important to you.

 

[kannon]

How do you title for your kids in Vanguard's account maintenance?

Is it Individual/Individual Name like "John H Doe"
or
is it Individual/Individual Name like " Iam Father (Deceased 1/1/2018), IRA, FBO John H Doe"

 

[SecondCor521]

I don't really know, as I haven't had to know yet. I do know that there is a proper way to title inherited IRAs, and I believe you are supposed to include the name of the deceased in the titling, so more like your second example. I figure when the time comes Vanguard or my Dad's estate attorney will be able to properly advise on titling.

 

[gindie]

How do you title for your kids in Vanguard's account maintenance?

Is it Individual/Individual Name like "John H Doe"
or
is it Individual/Individual Name like " Iam Father (Deceased 1/1/2018), IRA, FBO John H Doe"

When you specify the beneficiaries, you just specify their names (John H Doe, in your example).

When the IRA account owner dies, then Beneficiary/Inherited IRA's are created for the beneficiaries and those will have the special titling you refer to above.

 

[akck]

I believe it works the no matter what broker you’re using. Upon proof of death, the broker will divide assets according to the specified beneficiaries percentages. They will correctly title the accounts and suggest each beneficiary set up automatic RMDs. It will be up to the beneficiary to ensure enough cash is available in the account to cover the RMD, otherwise you risk penalties.

Also, you can usually assign primary and secondary beneficiaries. One option is to name your spouse as the primary beneficiary and children as secondary. That way, you can postpone RMDs if you’re under 70.5, versus your children having to make withdrawals immediately for the deceased spouse.

 

[kannon]

Thank you Everyone!! Just the information I need.

 

[racy]

My wife and I have IRAs. Primary beneficiary of each is the spouse. Secondary beneficiary is our Trust (which we update occasionally as things change).

 

[SecondCor521]

When you specify the beneficiaries, you just specify their names (John H Doe, in your example).

When the IRA account owner dies, then Beneficiary/Inherited IRA's are created for the beneficiaries and those will have the special titling you refer to above.

My reply in #8 was because I was a little unclear on what your question was, but because you used the word "titling" in your question, I assumed you were referring to how the inherited IRAs should be titled after the original IRA owner passed. In my situation, the original IRA owner is my father, who is still living.

gindie's answer above is clearer, because it also addresses the situation where you are naming beneficiaries, which is probably what you were actually asking, now that I reread your question.

The only thing I would add is that if you simply name your child as beneficiary ("John Doe") AND have multiple beneficiaries AND one of those beneficiaries predeceases you AND you don't change anything, THEN that beneficiaries' share will generally be distributed to the other beneficiaries' portions. This may be OK if you have young children but may not be what you want if that beneficiary has children.

That is our situation. My Dad has IRAs and three kids, each of whom also has three kids. So if my Dad listed his IRA beneficiary as "secondcor521" and I died before he did, my 1/3 would go to my two sisters, who would both get 1/2; it would not go to my three kids. Since that is not what my Dad wants, he has listed his beneficiaries as "secondcor521 per stirpes". In that same scenario, if I died before he did, my sisters would get their 1/3 portion and each of my three kids would receive 1/9 of my Dad's IRA.

 

[Sue J]

Evening -

I read a good book recently by Ed Slott on IRAs. Was hoping to get real world experiences from those on this blog.

Basically my wife and I each have traditional and Roth IRAs. Financially it looks like we will not need to tap into them before RMD time. We probably won't need the RMD for living expenses.

Our ultimate goal is to allow our two children to inherit our IRAs in the best financially means possible so as the funds can continue to grow as best as can be.

Was hoping for anyone on this blog who has dealt with IRAs at Vanguard and how they set them up (e.g., beneficiary titling,...) so they could be inherited by their children.

Kannon

Your IRA is not an "inherited IRA" until you die. You don't do anything to "title" it differently while you are alive.

If your children inherit your IRA when you die, it is divided among them as you have designated and each child's new account is titled as

Child's full name
BENEFICIARY of Your Name

My Dad's IRA was at Wells Fargo. My sister and I were beneficiaries at 50% each. When he died it was split between my sister and I and Wells Fargo opened an Inherited IRA for each of us. Soon after I transferred mine to Vanguard, my sister moved hers to Schwab. My Vanguard account is an Inherited IRA titled as I mentioned above, separate from my Roth and Traditional IRAs.

An Inherited IRA has a different RMD table than your own IRA. Vanguard handles this very easily.

 

[HI Bill]

My mother had an IRA at another financial institution. I wanted to move it to Vanguard, as an inherited IRA. This was a three-step process. 1) Set up an Inherited IRA account at Vanguard; 2) Transfer ownership of the IRA from my mother to me in the form of a Beneficiary IRA; 3) Submit the transfer paperwork to Vanguard, and they took care of moving the funds from the third party to Vanguard. Not too bad. But having the funds all at Vanguard, and planning to leave them there makes it as simple as designating beneficiaries, and when you die, they just have to prove the death by providing a death certificate, and VG will transfer the funds to a properly titled beneficiary IRA. Another thought would be to gift each person $15K annually until then, as this would not be subject to income taxes under current law (gift tax limit for 2018).

 

[MooreBonds]

Our ultimate goal is to allow our two children to inherit our IRAs in the best financially means possible so as the funds can continue to grow as best as can be.

Was hoping for anyone on this blog who has dealt with IRAs at Vanguard and how they set them up (e.g., beneficiary titling,...) so they could be inherited by their children.

Do a forum search for "Vanguard service". You will see numerous posts about the quality of Vanguard's customer service in many instances (I'll give you an executive summary: Vanguard is great for ultralow expenses...but not-so-great at back of house operations).

My own experience (on transferring my grandmother's IRA to my father, myself, and my siblings as her heirs) coupled with others' makes me leery of interacting with Vanguard for account actions.

Granted, once you finally go through the hoops and get everything retitled/transferred, it's not bad....but not only is Vanguard's web interface not the best (albeit much better than in years past), but that coupled with customer service frustrations would lead me to strongly recommend other brokers, unless there are specific funds/ETFs that you really, really, really want to own through Vanguard and not available through other brokers.

If you are only leaning towards Vanguard because you want to save $10 on commissions on a few Vanguard ETFs....save your heirs a few gray hairs and use a different broker for an IRA to will them.

 

[Bogie]

My wife and I have IRAs. Primary beneficiary of each is the spouse. Secondary beneficiary is our Trust (which we update occasionally as things change).

Isn't there an issue with a trust being the beneficary of an IRA since a trust doesn't have a life expectancy? If I remember correctly, the trust would have to pay income taxes on the entire IRA when the trust takes ownership of the IRA.

 

[nwsteve]

do a forum search for "vanguard service". You will see numerous posts about the quality of vanguard's customer service in many instances (i'll give you an executive summary: Vanguard is great for ultralow expenses...but not-so-great at back of house operations).

My own experience (on transferring my grandmother's ira to my father, myself, and my siblings as her heirs) coupled with others' makes me leery of interacting with vanguard for account actions.

Granted, once you finally go through the hoops and get everything retitled/transferred, it's not bad....but not only is vanguard's web interface not the best (albeit much better than in years past), but that coupled with customer service frustrations would lead me to strongly recommend other brokers, unless there are specific funds/etfs that you really, really, really want to own through vanguard and not available through other brokers.

If you are only leaning towards vanguard because you want to save $10 on commissions on a few vanguard etfs....save your heirs a few gray hairs and use a different broker for an ira to will them.

+1 amem

 

[gindie]

Another thought would be to gift each person $15K annually until then, as this would not be subject to income taxes under current law (gift tax limit for 2018).

Want to make sure I understand. You are referring to non-IRA funds, correct?

 

[SecondCor521]

Isn't there an issue with a trust being the beneficary of an IRA since a trust doesn't have a life expectancy? If I remember correctly, the trust would have to pay income taxes on the entire IRA when the trust takes ownership of the IRA.

This is my understanding as well, except that I think the trust has to / can liquidate over five years. Still not as stretchy as people with life expectancies.

 

[Hermit]

Do a forum search for "Vanguard service". You will see numerous posts about the quality of Vanguard's customer service in many instances (I'll give you an executive summary: Vanguard is great for ultralow expenses...but not-so-great at back of house operations).

My own experience (on transferring my grandmother's IRA to my father, myself, and my siblings as her heirs) coupled with others' makes me leery of interacting with Vanguard for account actions.

Granted, once you finally go through the hoops and get everything retitled/transferred, it's not bad....but not only is Vanguard's web interface not the best (albeit much better than in years past), but that coupled with customer service frustrations would lead me to strongly recommend other brokers, unless there are specific funds/ETFs that you really, really, really want to own through Vanguard and not available through other brokers.

If you are only leaning towards Vanguard because you want to save $10 on commissions on a few Vanguard ETFs....save your heirs a few gray hairs and use a different broker for an IRA to will them.

I have found the folks on this board to be pretty picky. If the number of people here with most of their money at Vanguard are any where near what it appears to be, I think there is a good chance that you have had some problems that are not what the majority have experienced.

 

[meierlde]

I have found the folks on this board to be pretty picky. If the number of people here with most of their money at Vanguard are any where near what it appears to be, I think there is a good chance that you have had some problems that are not what the majority have experienced.

My 401k was being moved from Vanguard, I called and they did the transfer to an existing IRA with no hassle at all. Only issue was the 1099 for the rollover did not get mailed was left online only.

 

[ERD50]

I have found the folks on this board to be pretty picky. If the number of people here with most of their money at Vanguard are any where near what it appears to be, I think there is a good chance that you have had some problems that are not what the majority have experienced.

But a lot of people never really have to deal with anything out of the ordinary. For years, everything I needed from Vanguard, I was able to do on-line, it was all good.

Then I was helping my in-laws after my FIL passed, and for some of what we needed to do, having the brick-and-mortar Fidelity office nearby made things far easier.

So hearing from people who have not had a problem isn't as informative as hearing from those who did have a problem and hearing how it was resolved.
-ERD50

 

[SecondCor521]

But a lot of people never really have to deal with anything out of the ordinary. For years, everything I needed from Vanguard, I was able to do on-line, it was all good.

Then I was helping my in-laws after my FIL passed, and for some of what we needed to do, having the brick-and-mortar Fidelity office nearby made things far easier.

So hearing from people who have not had a problem isn't as informative as hearing from those who did have a problem and hearing how it was resolved.
-ERD50

For what it's worth, when my Mother passed away two years ago, Vanguard was very helpful and everything went smoothly with regards to her accounts there. They gave us a special phone number to call for some sort of department that just handles estate-related matters, and those people seemed very knowledgeable and capable to do what we needed to have done.
At a minimum, this included transferring her IRA to my Dad's IRA, stepping up the basis in their taxable account, providing us with a date-of-death valuation report, and creating a bypass trust account and moving selected assets into it. They also expressed their condolences every single time we called, which is probably in their handbook for things to do, but it was still appreciated.

I do agree that having a local office would be a nice plus, but I don't feel like not having one was much of a detriment.

 

[ERD50]

...

I do agree that having a local office would be a nice plus, but I don't feel like not having one was much of a detriment.

I totally agreed with that, right up until I helped settle my FIL's estate. He had a some stocks he inherited, some actual physical certificates, and some in street name at two different transfer companies.

Some of this was going to require a Medallion Signature Guarantee. It looked like with Vanguard, I would have had to mail the certificates in, and they need to be insured, and as I recall, the insurance was not cheap.

Fidelity held our hands at each step, and made it all super easy, did the Medallion Guarantee right there, and everything went w/o a hitch.

Bottom line, you don't know that you need the B&M until you do. I didn't.

-ERD50