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Growth in use of IRAs can make for tricky inheritances

The individual retirement account (IRA) is a relatively new thing within the experience of most people in New Jersey. They only came into being in 1974 when Congress passed the Employee Retirement Income Security Act (ERISA). Since then, the move to IRAs has been massive and it's had an effect on estate planning.

Some laws have been tweaked to address how retirement funding has shifted from employer-based plans to personal ones. At the same time, estate-tax rules have become more complicated and investments have become more volatile.

The result can be a lot of confusion for widows and widowers who inherit IRAs. There is no set of standard advice that works for everybody. Without the help of good legal and financial counsel, it can mean mistakes that can cost you.

There are some common mistakes. We offer a couple of them here with the confidence that you'll get what help you may need to flesh out the details:

•· Paying IRA penalties unnecessarily: When you inherit an IRA it might make sense to roll it over into one in your name. That might be true if you're 59 1/2 or older, the age at which you can withdraw IRA funds without paying a penalty. If you're younger than that and you need to tap the money, you'll pay a 10 percent penalty. Some experts suggest rolling the fund into a specified "inherited IRA." It stays in the name of the deceased spouse until you hit the 59 1/2 milestone. There are some other age-related trigger points that can come into play with this plan, so getting help with details is crucial.

•· Portfolio freeze: Some experts tell of clients who inherit IRAs and other investments that were managed directly by the deceased, without anyone else knowing about it. Sometimes they reflected a level of investment risk tolerance on the deceased's part that didn't line up with the widow or widower. It's important to get a handle on what's in the portfolio, whether you are comfortable with what it contains. If you don't, you can redistribute the funds into something that works. But again, get help.

•· Tapping Social Security: Social Security survivor benefits can begin to be drawn upon the death of a spouse. But if you begin taking them before your 60, the amount you get each month is less than what you would get if you waited until full retirement age.

Source: The Wall Street Journal, "Survivors' Biggest Mistakes," Kelly Greene, Nov. 12, 2011

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