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▣ Mid Twenties & Money
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Mid Twenties and Money – Sean Hughes
Summer 2010
Part I
At 26 years old I find myself trying to remember what it felt like just 2 short years ago to not have to worry about what the next job will be or what I can do to pay my bills this month. Unfortunately, these bills are not just the basics, but a mostly unpleasant reminder of a life of excess that I could never actually afford.
I lived a very comfortable life growing up in terms of wants and needs. We weren’t rich and we certainly weren’t poor, but decidedly comfortable. For a family of 4 we lived well. My parents only bought 2 new cars while my brother and I were alive to my knowledge, a Ford Taurus and a Ford Econoline Conversion van, everything else was used. We lived in nice neighborhoods, went to public schools until high school, and worked summer jobs while we weren’t in school. I was extremely fortunate enough to have a financial planner for a mother who enabled both my brother and I to attend college out of state without loans.
College - Undergraduate
While in college I briefly held a job as a grocery store cashier (which I was not fond of, mostly because I had to explain to my friends why I wasn’t going to let them use a fake ID while I was working) and the majority of the time (3+ years) as a clerk in the school’s bookstore and a tour guide.
The bookstore job was important as an undergraduate for three reasons. The first was that it was in a university building, when the university was closed, so was the bookstore. The hours never went past 6pm and they were flexible about working around my classes during the day. The second reason was as an employee, I was entitled to a 20% discount of all of my textbooks each semester. This was HUGE considering the ridiculous prices of textbooks. The third and final reason was I got first pick of the used textbooks and was first in line for textbook buyback at the end of each semester. This helped guarantee me the most money back at the end of the semester. Not only was I being paid for an easy job (being nice, helpful, and ringing up books and t-shirts at the register), but I had my nights and weekends free, and I was saving money on other large expenses.
The tour guide gig was a volunteer job by definition, however I found out the desk workers were paid. Needless to say I converted it to a paid position by working the reception desk in the visitor’s center. I worked about 25 or so hours a week in the bookstore and about 8 hours a weekend at the visitors center. Weekends at the visitor’s center were great. It got me out of the house at a reasonable time on the weekends; got me paid for a couple hours, allowed me to show off a university campus I loved, and introduced me to a lot of new people. The introductions included everyone from staff to the university President to incoming students (tour guides were allowed to sit in the President’s box as hosts at football games, which also meant at least 2 free meals!). Until the day I graduated I constantly ran into people on campus and in town that stopped me and introduced themselves as people who had been on tours I’d given.
Part II
I lived on campus for three of my four years of undergraduate studies. While not the cheapest price per month, it was cheaper when you factored in being gone during the summers (which weren’t included and weren’t billed for on campus but off campus, almost every single lease was a 12 month deal). This took out the stress of subletting during the summer and also had some health benefits. Living on campus, I walked EVERYWHERE. I walked to class, work, stores, bars, etc. I rarely drove which saved a lot in gas expenses (disclaimer: gas was paid for by my parents).
I actively sought out an internship for the summers of my junior and senior year. After interviews, I was offered a paid summer internship with a national homebuilder in Charlotte, North Carolina which I accepted. With some hard work and attention that summer internship turned into a full time job offer in the August I started my senior year. In addition over the summer I had held a (very) part time job for my senior year with the corporate offices of the same national homebuilder to help the corporate recruiters organize and recruit from my school. I was only paid $500 a semester for this, but it had several; hidden benefits. For one, $500 dollars is $500 dollars, and that goes a long way in a college town. Also, “organizing” meant talking to students in my classes about their job prospects and offering promising potential job seekers a free dinner at one of the nicest restaurants in town to hear the corporate recruiters give a personalized information session to a group of 10 or so students. I also got to attend these dinners for free and it was the only time I’ve ever been inside that restaurant.
With these developments and having people around me professionally and personally constantly talking about the money to be made in real estate and construction, I decided to look for a place to buy in Charlotte before I got there. I started out looking at single family houses in “up and coming” neighborhoods and quickly decided to purchase a condo in the heart of downtown. There were many reasons for this, mainly my desire to be able to walk everywhere other than work and reducing the amount of time I spent working on the home instead of enjoying the lifestyle I wanted. I found a new construction project that had just been announced, a 5 story mid-rise building and quickly put a deposit down on a one bedroom condo.
Part III
Professional Life – Post Undergraduate
I got to Charlotte and started work as a supervisor for residential homebuilding in a large community. I was making more than the national median income for a family of 4 at the time and only had to support myself. I drove an older car that was paid off. I had no real debt to speak of. I was paid once a month on the 15th, every month, on salary before bonuses and gas/truck benefits checks.
When my first paycheck came I felt as if I’d won the lottery. It didn’t take too long (maybe 6 months) to start acting the part either. I opened 2 of my own credit cards and proceeded to call every six months to ask for an increase in credit lines to help bolster my credit in general and in preparation for applying for a home loan. I paid all of my bills on time and rented a two bedroom apartment with a friend in the heart of the city. I ate out at restaurants frequently, drank expensive liquors and nice beers, and rarely turned down event tickets. I frequented Charleston, South Carolina where my girlfriend lived at the time (3 hours by car from Charlotte) and bought nice gifts for my family at the holidays. Bonus checks started to roll in each quarter and instead of putting them away for savings, I quickly discovered things to purchase with my newfound money. Among those things, a flat panel LCD television, a brand new Playstation 3, a new laptop, some new furniture, a cable TV 600 channel packages, a brand new blackberry phone with the accompanying phone plan, vacations, a new truck (new to me, barely used), expensive dinners at high end restaurants, etc, etc, etc. I quickly outpaced my income. I went from saving $800 dollars a month after bills at the start of my job to blowing in excess of $400-$800 dollars a month above my income. I was saving nothing and on top of that easing into debt. During this time I’d moved twice, my girlfriend had moved in with me in Charlotte, and that new truck with its assorted expenses had shown up in my driveway. I kept my balances on my credit cards reasonably low and generally still felt pretty invincible.
Soon however, that mode of living showed signs of financial distress. Once my credit card debt got too high for my tastes I applied for and was hired as a bouncer at a nightclub in downtown Charlotte as a second job at night. This was a temporary job for the start for me and I was doing it to help bring my credit cards back to comfortable levels. While it wasn’t the most glamorous of jobs, it paid well and taught me a few things. Probably the most important three lessons (and these stick with me today as I imagine they will for many years) were as follows:
- Having debt you have to worry about is not fun, it is exhausting. Due to my debt I was working at my salaried day job (construction management) from 7:00am until 6:00pm when I would rush home from the suburbs back to the city, inhale a quick dinner, don a suit and work at the nightclub from 7:00pm until about 3:30am every Thursday and Friday. Needless to say I was exhausted and spent a lot of Saturday (one of my days off from the day job) sleeping before I went back to work at the nightclub Saturday night.
- I quickly became familiar with the term “30 thousand dollar millionaires.” These were people the nightlife industry absolutely loved. They made anywhere from $25,000 to $55,000 a year as teachers, entry level corporate people, executive assistants, pretty much the majority of the going out crowd ages 21-35 years old. They showed up at a bar or nightclub and proceeded to act as if money was so plentiful it was not an issue to blow through a food and bar tab of anywhere from $100-800 a night. As much as I didn’t want to admit it, I acted like this when I went out, even though my salary wasn’t on the low end of that spectrum. My largest food and bar tab to date was around $250 dollars and that was a one-time deal. Worrying about any of this didn’t occur to me or my friends while we were out on the town. It didn’t matter what things cost for the most part, I was there to have a good time and I would do so no matter the cost. Obviously this is a foolish and irresponsible attitude towards money and adulthood. After seeing it night after night as a bouncer, I would never let myself act so casually about bar tabs and entertainment expenses ever again. This one will stick with me forever. Next time you are at a bar, have a look around. You will surely notice the “30 thousand dollar millionaires” at the bar. They are regular people with regular jobs acting like they are lottery winners or CEO’s, drinking the most expensive drinks, buying rounds of shots for friends and strangers, and usually making the biggest scene. They are deep in debt, I know from personal experience.
- Finally, I learned that this level of debt and that lifestyle choice was not worth it for me personally. I treasure my time off from work and working a second job to maintain a lifestyle was ridiculous and embarrassing to me personally.
Part IV
Eventually I quit the second job and then other events created new financial stresses. I became quite sick due to negligence of a cavity which resulted in a massive dentist bill for 3 root canals, 3 crowns, minor surgery and antibiotics to quell jaw infection. The subprime crisis hit and the construction industry started to contract. Layoffs came and went at my company and I survived the first several rounds. Soon the entire economy was contracting violently and the general mood in the construction industry was dismal. Eventually I lost my job however I was transferred to sales and marketing with the same salary but lost my truck and gas reimbursement checks each month. Now I was on my own for my relatively brand new 4 door full size truck, a vehicle I love but would not have chosen for myself if I had known I would be paying for it completely on my own. I grew to hate my sales and marketing job for a homebuilder. It became clear most people couldn’t afford their current homes let alone buy one of ours yet my job was to convince people otherwise. I didn’t last long before I decided I’d never sleep well if someone bought a house from me I knew they couldn’t afford in far flung sprawling suburbs. The writing was on the wall in my opinion, the residential construction industry was about to take it on the chin and I had too much pride and work ethic to wait around to be laid off and collect severance. In hindsight I should have collected the severance.
I quit my job in September 2008 and activated my dormant real estate license to sell downtown urban properties, a lifestyle I knew and loved. In November 2008, my former office had the big layoff, going from roughly 75 people to 20 overnight. I struggled to pay my bills and fortunately got help from my parents to help get me through the first several months of 100% commission. Let me be clear, I knew the real estate industry was in shambles as well, but it was an available option to me and I had to do something that would lead to money while I continued searching for other jobs and contemplating my next step in life. I ended up selling 2 houses in those 9 months, and they were truly great deals for the buyers, in close in neighborhoods for young couples who were completely prepared for home ownership.
During this time (3+ years from the original contract date) the condo I purchased experienced delay after delay after delay. Problems were rampant and should’ve sent off alarms but I was emotionally attached to the idea of owning a home at that point. I received a letter with a closing date on it right around Thanksgiving in 2008. We needed appliances and furniture for the new condo, which appeared to be nearing completion via the letter stating a closing within 45 days. There were many appliance sales going on at the time and we financed a “no payment, no interest” washer, dryer and refrigerator for 12 months out, figuring we’d be back on our feet before the bills came due. The closings were pushed back indefinitely while the developer and contractor tried and failed to secure the final certificates of occupancy on the building from the city and county. When the appliances couldn’t be kept in the store warehouses any longer and had to be delivered I got permission to have them put in my condo before closing from the developer (an absolutely horrible idea in hindsight). When the appliances were delivered and I walked through the building, it became obvious the end was nowhere in sight. Punch lists were incomplete and some construction was unfinished. I demanded the developer compensate me for my troubles and we agreed that my girlfriend and I would move out of our apartment and into an empty condo the developer owned in another fancier building down the street rent free until the new condo was ready. The empty condo turned out to be a $700,000, 2200 sq ft corner unit with all the nice finishes. We barely inhabited half of it. The condo we were buying? Not even 700 sq feet and $165,000. So this was making a hard transition even worse, knowing the condo we owned would feel small compared to our temporary digs. Eventually it became crystal clear the condo was going to implode financially before the developer finished it due to the extended time frame of construction (1 year past the finish date in the contract), people pulling out, and condo buildings failing to fill up city wide.
Part V
We moved out of the temporary condo overnight and back to our former apartment complex. I collected the appliances we bought from the new condo the next afternoon and put them in storage. I returned the keys to the developer and informed them in person and via writing that we would no longer be purchasing the condo, we were no longer residing in the unit in the other building, and I would never ever do business with them again, personally or professionally (remember I was a realtor at this point for downtown properties). They kept my deposit through a legal loophole in the contract, $3500 my grandmother had left for me when she passed away. I’m still sick about that loss of money particularly because of where it came from. I also liquidated the small 401K I had put together at my previous job.
As it turned out, not buying the condo turned out to be an extraordinarily good decision (finally!). The condo building did fail financially, only 4 closings occurred before the rest of the 81 units converted to rentals. This would have been a real estate nightmare. Those 4 owners will never be able to sell their condos due to the loan clauses in every home loan at the time that stipulate less than 50% of the building can be rentals. In other words, no one will ever be able to get a loan to buy one of those 4. I don’t know whatever became of those 4 closed units.
My girlfriend was finishing her Masters degree in Healthcare Administration at the time and we did a bit of soul searching. Charlotte was a great town but home to Bank of America, the former Wachovia bank, NASCAR, huge real estate and construction companies, the job market was literally flooded with tens of thousands of over-qualified people looking for jobs in small geographical area (because no one could sell their homes to get out) as the mega employers shed jobs by the thousands. We discussed things we wanted in the next place we lived and after much discussion settled on Charleston, South Carolina. Not owning the condo allowed us to move easily and without worry of leasing, etc. This is another idea that will forever stick with me. In the foreseeable future I doubt I will ever buy a home to live in myself for more than 2 years at a time. I believe this is a generational thought. Many writers have begun to chronicle just how important being mobile is to find jobs, something that my age group is deeply concerned with in the current time period. If and when I ever do buy a home, it will be with a plan and exit strategy of no more than 2 years. This is a moot point until the real estate market improves, which may take years. In other words, being mobile and adaptable to the job market is too important to me to even consider owning a home, something I believe to be somewhat of an economic trap for my age group. I can also rent in neighborhoods I’d never be able to afford to own in, neighborhoods that offer me the active urban lifestyle and sense of community I desire. If my tastes change, guess what, I’m a 12 month lease away from a new place. I also decided to go back to school to help change careers. My marketing degree was not a deal maker for any potential employers and I wanted to switch into an urban planning, urban affairs position.
College – Master’s Degree
My girlfriend got a job at a long term health care facility and has done well there. However the move to Charleston has not been without economic peril. My revolving debt ballooned as I lived off credit cards during my last several months in Charlotte. To make matters worse, American Express cut my credit limit by over two thirds overnight. This killed my debt to credit ratio and subsequently my credit score, making it harder for me to be versatile with my existing debt and expenses. When we got to Charleston we rented a tiny 1 bedroom apartment no more than 600 sq ft right in the middle of downtown. I was accepted into the Masters of Public Administration program at College of Charleston. I walk to and from classes and my part time job on campus 30+ hours a week. I’ve paid off our appliances, my dental bill and am slowly working on the credit card bills. The truck payments will last for 20 more months and I’m living off of graduate student loans while my money from work goes to paying down bills. Working for the government after school I’ll get my loans written off after 10 years of on time payments at a relatively low interest rate.
While I thoroughly enjoy my studies I’m determined not to make the same mistake I’ve seen others my age make, which is assuming a master’s degree is a free job ticket. I’m working hard outside the classroom to attend community meetings, complete unpaid internships, attend networking events and generally being socially involved with the community in order to make connections with people who actually do the type of work I’m interested in and who work with the people who do the type of work I’m interested in. Several years ago, I heard someone say “It’s not the grades you make but the hands you shake.” I believe this, especially with this dismal economic situation. This brings us to my current station in life, beginning my second and final year of my Master’s degree, slowly paying down revolving debts to get to a point where I only have graduate loan debt and a few months of truck payments left in debt before I graduate. In the past week I was offered a Graduate Assistantship after many applications, emails, discussions, and an interview. This is an important development for several reasons, the largest reason is the position grants me tuition abatement, meaning my out of state tuition is waived and I only have to pay in state fees. This means less student loan debt, especially after my school announced a $1500 tuition increase for all graduate students yesterday – ouch. It also pays me a stipend for each semester based on 20 hours a week of work in the urban policy office in which my graduate assistantship is located. As a bonus, I get to work on urban policy issues, the thing I’m actually here for in the first place!
Conclusion
In terms of the way I think about financial matters, I’ve done a 180 degree turn. I abhor credit card debt. I dislike pointless and fleeting financial excess and do not want to be part of the 30 thousand dollar millionaire masses. I’m terrified of being trapped in a property ownership situation in case I have to move to find a new job again. I generally only spend money on items that will last a long time, are sold at a fair or good price, are built or created with quality, and that are well liked and reviewed by others. It is not always the latest and greatest gadgets or toys, but the things I buy now (whenever I buy, which isn’t nearly as often as I once did) bring me a different type of happiness. That happiness is the freedom of knowing that soon I will no longer be beholden to things, but have the freedom to live a simpler, more enjoyable life financially.
▣ Love is in the Air
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Love is in the Air – Planning Past the Wedding
Have you noticed the magazine covers this month? Not that one – Sports Illustrated notwithstanding, you are probably looking at several wedding covers on the magazines in your grocery checkout line. If you have young adults in your family, chances are you’ve experienced the wedding vortex on some level or may soon. If you are a young adult you may be planning for this or have friends who have been through it. Noting that this one day party leads (hopefully) to a lifelong marriage, we want to take a look at what young couples might discuss before the big day and how they may prepare for a mutually satisfying financial life together. If a wedding takes up to 16 months or so to plan, it seems reasonable that some of that time could be spent learning more about the financial habits of the person you intend to spend the rest of your days with. It is interesting to me that almost every media mention of a wedding includes the strong recommendation to hire a wedding planner but you rarely see it mentioned that the couple should hire a financial planner first. Let’s take a look at just some of the things that might be revealed by working with a financial planner as you set up your lives together.
I am working with a young woman now who was already a client and now that she is getting married, she is asking great questions about her future financial life with her fiancé. My client inherited some money at a relatively young age and she is wise to seek counsel regarding how her financial life as part of a couple will be different. Our last quarterly meeting included the announcement of her engagement to me, her planner, and her fiancé will be in our next quarterly meeting as they develop their plans.
Everyone has a financial personality. There are varying degrees of course, but bottom line; people are either a spender or saver to some degree. And everyone has a money history. That money history often informs how someone deals with money today. If we declare neutral ground (the planner’s office), and lay some ground rules; there are no wrong answers, only discovery, our purpose is to learn about each other and share each person’s history and needs and wants.
Money History:
1) When you were growing up, did you believe your family had enough money, not enough money, lots of money, or it never came up?
2) When you grew older, was what you believed about the money in your family true?
3) Was money discussed in your family? How, how often, in what context?
4) Were you given any instruction around money as a child? (Save for a rainy day, tithe, work odd jobs for pay or ‘don’t worry your pretty little head about that, Daddy’s got it covered’)
5) Did you receive allowance as a child?
6) Did you perceive your parents were similar in their money habits or different?
7) Did you identify with one parent over another in the way they handled their money?
Financial Personality:
1) Do you think of yourself as a spender or a saver?
2) Do you have a checking account and if so, do you balance it monthly?
3) Do you pay for most things with cash, credit card, debit card, or a check?
4) How many credit cards do you have and how many do you use?
5) Do you carry a balance on any of them?
6) Have you ever maxed out your credit cards or made late payments?
7) Do you know your credit score? If so, what is it?
8) Do you research major purchases?
9) Do you track your expenses?
10) Do you make many impulse purchases?
11) What are the terms (rate, term, payment, total amount owed) of the debts you have?
12) Do you understand each line of your paystub?
13) Do you have health, disability, and life insurance?
14) Do you have any outstanding debt collection issues (taxes, liens, past due accounts)?
15) Do you own any investments?
16) Are you working with a financial planner?
Going forward, together?
1) Would you be willing to work with a financial planner to let them to establish a relationship, collect all our data, work with us to develop our mutual goals, develop recommendations for us, implement those recommendations on our behalf, and then help us monitor our plan going forward?
2) Is either of us planning additional schooling?
3) What is our approximate timeline for starting a family if that is in our plans?
4) What are our mutual goals (owning a home, starting a business, travel)?
5) What constraints are we facing (one of us may have to re-locate; one of us may have to assist an elderly relative)?
6) Is either of us expected to inherit money? This can be a source of sharing resources but the couple will want to explore legal options for keeping the inheritance separate from shared monies.
Exploring these conversations with the person you care most about can enrich your futures in ways that will allow each of you to enjoy your mutual and shared resources throughout your lives together. When you think about hiring the wedding planner, make sure you make an appointment with your financial planner first. Then you can get out there in the world together and go in the direction of your dreams.
▣ It's all in the Family
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It’s All in the Family
By Bonnie A. Hughes, CFP®
When planners work with families, a lot of storytelling goes on. The family tells their financial stories of how they got to this place in this time and planners will often share their own stories and anonymously, they may share the hard won experience from other client cases. Every family is different and most of us have a preference for the tone and tenor with which we like to share things inside a family. With that in mind, let’s explore some basic conversations that are helpful to have in every family.
It can be true that children learn what they live. So as parents, first take a look at your own money history. What did you learn about money that you may, for better or worse, be teaching your children? We can model what we want them to learn.
An early discussion about both parents’ contribution to the household seems appropriate to helping children understand that everyone is pitching in. If one spouse works inside the home, recognizing this person’s contribution is important. And for those working outside the home, that contribution should also be recognized. When financial strain hits a family, it can be instructive to talk about its impact and make it easier to support each other until things get better.
The families that I’ve seen are the most successful when transferring knowledge about financial stability and success are those that have enough conversations around money that a lot of the mystery around it is dissolved.
Even in a capitalist society we do not infuse our K-12 curriculum with financial education so if it doesn’t happen at home, it’s not likely to get covered. That can mean some very rough sledding ahead for those who do not have the benefit of a lifetime’s worth of conversations on all things financial.
Other conversations that may be helpful to have throughout childhood could include:
Ø What does ‘being wealthy’ means to you
Ø Choosing your own path vs. what neighbors and friends might choose
Ø when to get a first job
Ø what to expect from those early jobs
Ø when you work those early jobs, can the family match your earnings so you can contribute to a Roth IRA?
Ø What advanced schooling is appropriate for each individual child
Ø Where that schooling will take place (community college, state college, an elite private school)
Ø How to pay for that school (will the student work, can an employer pay, will the family be able to help, are loans or scholarships available)
Ø Once adulthood is reached, what is a good savings rate to insure financial security down the road?
Ø Emphasize ‘doing the math’ (it’s been surprising and disappointing how many financial decisions are made on hunches or rules of thumb vs. sitting down and crunching the numbers)
Once the concept is understood that money doesn’t know or care who owns it, but that our choices can affect the degree to which we obtain it, use it, share it, and enjoy it; we can move money in the direction of our own dreams. Taking away the taboo of talking about money increases our chances of gaining and keeping perspective around it.
So bottom line, keep talking!
▣ Why Every College Freshman Should Start an IRA
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Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible. Here’s some information about Roth IRAs and ideas for students to find the money to fund them.
The basics of Roth IRAs: It’s good to start with describing the difference between a traditional IRA and a Roth IRA and why Roths might be a better choice for the average student. Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If someone leaves their savings in the Roth for at least five years and waits until they're 59 1/2 to take withdrawals, they'll never pay taxes on the gains. For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.
Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time. Also, some institutions offer cash bonuses for starting an account. Go with the best deal and start by putting that bonus right into the account.
Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal. One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.
Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives. Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than blowing it at the mall, they might feel considerably better about the money they give away. At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.
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August 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bonnie A.Hughes, CFP®, a local member of FPA.
▣ Eldercare
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Eldercare Practices and Serving Seniors Well
by Bonnie A. Hughes, CFP®
A question was posed recently by a columnist: Besides having a grandmother whom you like a lot, what qualifies you to work with seniors?
Dave Demming, a planner in
Want to know more about Eldercare and how
▣ An inherited IRA - now what?
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From a www.bankrate.com article, "So, if you think you might inherit an IRA from someone other than your spouse, such as an elderly parent, it's wise to do some advance planning if you can. According to Bonnie Hughes, CFP, your options for handling the account are a little trickier. In particular, there are some thorny rules regarding designating beneficiaries for IRAs.
In most cases, says Hughes, IRA beneficiaries should be actual, named people -- known as designated beneficiaries -- rather than simply "my estate" or "my living trust." Another no-no: leaving blank the space on the IRA beneficiary form (available from the financial institution that holds the account) in the mistaken assumption that the account automatically will be distributed to heirs as part of their will.
Why? "Trusts, estates and other entities don't have life expectancies," says Hughes. If they 'receive' an inherited IRA, they must draw down,and pay taxes on, the entire IRA account within five years or according to distribution plan of the original owner, if the owner had already begun taking distributions before his or her death, says Hughes."
2004
Want to know more and the most up to date rules? Contact American Capital Planning at 703.579.7031 or meeting@americancapitalplanning.com.
