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My boyfriend's father, age 77 years old is retired.

I recently learned that his father was not managing his retirement accounts well at all.

Specifically, 90% of his nest egg is in stocks.

He has not taken a single mandatory distribution from his IRA or 401k.

He receives SS and a pension which I believe pay most of his expenses including a mortgage. He has no tax liability as his mortgage interest deduction wipes out his AGI.

I told my boyfriend to have him set up his mandatory distributions immediately, but we were wondering what is the best way for him to reallocate his portfolio.

He can convert some stocks to bonds in his taxable account. This will initiate a capital loss of 10,000 or so. Or he can convert the stocks in his 401 and IRAs to bond funds.

I don't know all the details of his financial picture. I do believe the eldest son helps with a few of the parent's expenses from time to time. I do not believe they have any other debt besides mortgage.

The last thing complicating the picture is my boyfriend's mother who is only 62 or so and in good health. Our hope is to preserve his money both for the duration of his lifetime and his wife's lifetime.

My thoughts were to put 50% into dividend producing stocks to allow him to have some income and the remainder into bonds.

Or potentially purchase an annuity for income purposes.

Any thoughts?
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You won't like my thought, but I don't see any good way that someone can tell their boyfriend's 77 year old father that he doesn't know how to handle his own money. I'd steer well clear of this one.
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stardustangel: "My boyfriend's father, age 77 years old is retired.

I recently learned that his father was not managing his retirement accounts well at all.

Specifically, 90% of his nest egg is in stocks."


While a bit high, that is not necessarily a problem if is other income is adequate for his needs.

"He has not taken a single mandatory distribution from his IRA or 401k."

If he has 5+ RMD that were not taken, he will owe a bunch in taxes and penalties. I do not recall if any of the tax gurus post on this board regularly. You might look at the FAQ on the Tax Board or check out www.fairmark.com

"He receives SS and a pension which I believe pay most of his expenses including a mortgage. He has no tax liability as his mortgage interest deduction wipes out his AGI."

It must be a huge mortgage and/or at a very high interest rate, plus what does he use for other spendign money if his SS and pension all pay mortgage interest?

"Or potentially purchase an annuity for income purposes."

That would be about my last choice.

Regards, JAFO


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I have to agree that in your position you are most likely out of the loop and any advice you offer would risk being seen as inappropriate and even if well intended they may think that you are somehow scheming to get their money. People are funny about money.

It may also be that you don't have all the facts. Many financial institutions automatically make the required minimum distributions late in the year even if they have not been told to.

You could give them an easily readable retirement/financial-planning book or videotape for Christmas. There might be some suggestions for something like this on the AARP website.

Most annuities are generally not a good choice for most people, especially when interest rates are low like they are now. Search the fool.com website for more info.

Greg
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I didn't voluntarily jump into this situation. While watching Suze Orman, my boyfriend, revealed to me that he was worried about his parent's retirement situation.

With some probing this is the information he came up with. He asked for my thoughts knowing that I strive towards Fooldom and have access to this discussion board.

I know for a fact that they have not been taking the mandatory distribution. I also know that they are short every month- my boyfriend's brother makes up the difference - a burden I'm sure he would be happy to be relieved of.

My question which has been posed to me and I am now posing to the boards: aside from the mandatory distribution, how do they generate income from their current investments while preserving wealth for his mom.

My thoughts were 50% dividend producing stocks, 50% bonds, or an annuity to guarantee them some income.


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To not take mandatory distributions can get one in a pile of hot water with the IRS in a hurry, with penalties. It would be difficult for a financial insitution to know what else one has; for the purpose of mandatory distributions all IRAs are lumped together. You don't have to take a distribution from every account. If you have five IRAs, you can choose to take the whole mandatory distribution from one of them, nothing from the others. How would the trustee know, unless your Financial Advisor (broker) is on the ball and asks?
Each IRA reports to the IRS the balance of the account at the end of the year. The mandatory distribution is calculated on the basis of these totals. Time to go back to the figures and take those distributions, because the penalties are mounting. He'll probably owe the IRS more than the distribution.
I wouldn't put % of desirable assets in stocks, so much as enough of a $ amount to generate the needed income for expenses. It sounds like he doesn't have enough and needs more income from his investments.
Best wishes, Chris
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Well, of course, the right answer is that he needs to develop a timing and trading discipline.

Otherwise, an annuity is probably OK.

I don't know how he as avoided taking the distributions. That could cost him some money.
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I could not find anything on the Tax Board FAQ; maybe I missed it. You might try posting a question there regarding RMDs.

Not much on the REHP FAQ either; again, maybe I missed it.

Might check out IRS Publication 590 - Individual Retirement Arrangements.

See pages 30-35 at http://www.irs.gov/pub/irs-pdf/p590.pdf

"If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required."

And pages 39-52 (especially regarding Excess Accumulation/Insufficient Distributions commencing on page 50)

A quick Google:

http://www.irs.gov/retirement/article/0,,id=96989,00.html

http://www.finance.cch.com/sohoApplets/RetireDistrib.asp

http://www.bankrate.com/brm/itax/news/20010321b.asp

http://www.tdwaterhouse.com/planning/retirement_center/retirement_advisor/livingretire/rmd_planner.html

"If you fail to take the minimum, the Internal Revenue Service stands ready to confiscate 50% of the shortfall. That's the penalty if you fail to take the minimum. In the past, the IRS didn't have a way of knowing if you didn't comply. Now, however, in the years to come, our IRA company will be sending us and our partners at the IRS a notice telling us the exact amount we are required to take."

At http://www.estateattorney.com/irarbd.htm

Look especially at page 3, right hand block at

http://www3.prudential.com/investing/pdfs/URMD42103Final.pdf

Penalty for failing to meet RMD, income tax on RMD, and since this has gone on for years, penalties for failing to pay tax timely.

Letting this situation persist will be an incredibly expensive education!!!

Regards, JAFO
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"Letting this situation persist will be an incredibly expensive education!!!

Hi JAFO,

I didn't read all your links but I seem to recall that the minimum withdrawal can be calculated based on the age of his wife or it is at least factored in some way.. being 62 I think that may make for lower numbers at least... Sure hope I'm right.

Not an expert here but they should make sure about this...

Regards, Ken ( My apologies if I'm wrong...)
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Matt1344: "Hi JAFO,

I didn't read all your links but I seem to recall that the minimum withdrawal can be calculated based on the age of his wife or it is at least factored in some way.. being 62 I think that may make for lower numbers at least... Sure hope I'm right.

Not an expert here but they should make sure about this..."


I am no expert at either RMDs or Taxes. I do hang around the Tax Board, and I am observant.

As I understand the rules, the beneficiaries age can be taken into account, and there are different rules for spouse beneficiary versus naming 5 year grandson/granddaughter.

It will all be covered in the IRS publication that I cited.

Regards, JAFO





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There appear to be two types of issues here. One is a "legal" issue -- not taking required IRA withdraws. The second one is having funds invested in stocks.

As others have said, getting into this could be unpleasant -- I say stay away from the second issue until and unless you are asked clearly for an opinion. If that happens, I would say look at RetireEarly.com which suggests index funds and bonds.

Regarding the first item, if you want to get into it, I would say to your boyfriend something like, "It is none of my business, but your parents could be a a lot of trouble with the IRS if they don't deal with this. The only issue is how much penality and interest has to be paid. Then I would let your boyfriend carry the message.

There is some change your boy friend will do nothing. There is also some chance, the parents will do nothing. You need to accept those possibilities exist and think about whether you can accept inaction and its consequences - assuming your relationship continues. It is sort of another version of that story, You can lead a horse to water, buy you can't make it drink.

Good luck

Gordon
Atlanta
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I think there is something that everyone seems to be missing.

There is the issue of the withdrawals. That has received a good bit of attention.

There is the issue of the stock vs. other assets question. Some comments there.

No one has raised the issue of estate planning. As the wife is only 62 and women generally live longer I am guessing she could need 30 years of income. Independent of the husbands situation and age any plan needs to address what are likely to be her needs as a surviving spouse.

Questions about the estate size, the tax impact, what should happen after the two of them are no longer with the family, long term health care if they need to live in an assisted living situation all need to be planned.

Being heavy in stock when a person is 62 might not be such a bad idea. Being heavy in stock when the couple need regular assistance from a child implies otherwise.

As the girlfriend of the son who is not making contributions I am not sure there is much room to deliver effective advice. If they do want to listen suggesting some professional advice from both a tax attorney and a financial planner could be the best way to help without being seen as pushing an agenda from the outside.

BTW - Even direct family members can have no influence. I have been on all sides of this (almost all sides) and some accepted advice and had things sorted in time while others left a mess for the children to clean up after the IRS pick up their gold.

John
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So skip the annuity, and make sure any suggestions are made by your boyfriend rather than you. A 50/50 or 60/40 asset allocation seems appropriate, although I might prefer to see it in a no load, low managment fee Vanguard balanced fund, rather than the expenses incurred with individual stocks and bonds.

db
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Ken,

It's the age of the beneficiary of the IRA that matters, and it can reduce the RMD to that of an IRA holder up to 10 years younger.

db
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If he has 5+ RMD that were not taken, he will owe a bunch in taxes and penalties.

Just to be sure, is the IRA a Traditional IRA or a Roth IRA? The OP did not mention this but I assume it is a Traditional IRA. In that case, certainly follow up as JAFO has mentioned. However, if this is a Roth IRA, then there are no RMD.

dt
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Ken,

It's the age of the beneficiary of the IRA that matters, and it can reduce the RMD to that of an IRA holder up to 10 years younger.

db



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db,

I believe the above post was your one-thousandth post, hereby morphing your 3 small golds into one Big Red Star.

Congrats!

sunray
part-time stargazer


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"It's the age of the beneficiary of the IRA that matters, and it can reduce the RMD to that of an IRA holder up to 10 years younger.

Hi db,

Thanks. I knew the withdrawal age didn't change just hoping for his sake that with a lower RMD the penalties would be a little less.

Regards, Ken
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hereby morphing your 3 small golds into one Big Red Star

Wow Don,
Those Birtchers really got to you growing up, eh? Now you're a commie?!?!?
Heh.
Congrats on your milestone. I enjoy your contributions to the boards.

Keith
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Wow, Ken. By the way, didn't stargazers used to refer to the tilt . . .

Better not go there; I've yet to have a post pulled.

db
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By the way, didn't stargazers used to refer to the tilt . . .



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+++


SOoooo, db, are you saying that I shudda referrred to myself as a phamous astrologer, er, ah hmmm, I mean, astronomer?


sunray
not really phamous

p.s. Every star has a story.


ref:

http://www.harcourtschool.com/activity/stars/
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