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The Advisory Firm Newsletter:  February 2012

THIS MONTH IN PERSONAL FINANCE: Stretch IRA & the 5 year rule, Medicaid, and the Federal Reserve


Happy Valentines Day..... This month I have a variety of topics to cover, some picked right from the news headlines and others based on real life scenarios I have encountered over the past few weeks.

Before we get started may I direct your attention to the left hand column. There you will find a 2012 Financial / Tax Quick Reference Guide available for download. I also have a limited quantity of glossy printed copies that I can mail. Just follow the instructions on the page that pops up to request yours......


The rules can change in the middle of the game!

Unfortunately, I don't think this will be the last time this issue pops up and it only portends more potential surprises in the future.

What am I talking about? Well recently the following headline popped up regarding our Politicians wanting to change the rules on inherited IRA distributions. (you can click on the link to read full article)


As the rules are currently written, when you pass away you can leave your IRA to whomever you wish. If it is a spouse they can take ownership as if it was their personal IRA. If it is a child or anyone else they title it as an "inherited" IRA and have a few options: cash it out (very bad), cash it out over a 5 year period, or STRETCH it out over their lifetime (and further) by taking only the Required Minimum Distribution each year. The last item is called a STRETCH IRA, as it allows the beneficiary to only take small distributions each year based on their age/lifespan and it allows that inherited IRA to continue growing tax deferred. The problem with this (as viewed by politicians / IRS) is that if someone in their 20's or 30's inherits an IRA it could continue to grow for decades without the folks in Washington getting any sizeable tax revenue! They would much prefer you to inherit an IRA and take a full distribution so that they get all the deferred tax revenue on the account.

So that is exactly what was brought up in committee recently, make individuals who inherit an IRA completely drain the account within 5 years.

Luckily this week the idea was tabled and will not be considered (this year) click link:


So now you are wondering why I have wasted a few minutes of your time to address an issue that is now a non-issue?

For the simple reason that you need to pay attention and be aware that the rules can change. Unfortunately, as our debt continues to grow and Washington struggles to find additional sources of tax revenue, anything and everything is on the table. We will all be affected and only through actively paying attention to what is happening can you create a loud enough response that the politicians will listen. This current issue may or may not have concerned you, but what if next time they start messing with Roth IRA's and 401k's?


Medicaid Planning?

Okay, before you younger folks role your eyes, this is something that you could possibly have to deal with one day with a parent / loved one. The issue of Medicaid came up from a conversation I had recently. This person and their 85 year old Mom had attended a Lunch lecture hosted by an attorney recently. The topic was how to protect your assets from healthcare expenses. The basic premise of the "lunch lecture" was to scare the attendees to death that medical costs were going to devastate Mom or Dad's assets leaving nothing for them to pass to the kids or grandkids. To solve this problem they needed to do Medicaid Planning with the attorney and he/she would show them how to get money out of Mom's name and not have it subjected to nursing home expenses, hence Medicaid would kick in and cover.

This person then went on to talk with their Insurance guy and then their local Financial Advisor, and everyone gave such different advice about what product would solve all the issues, that they left even more confused.

I am not going to jump into the "ethical/moral" issue of getting rid of assets to qualify for a taxpayer funded program that is probably the biggest hot button item here. But wanted to simply share the story and give you some basic facts about Medicaid and break down this case a little more.


  • is a joint Fed/State funded health insurance program for the poor and indigent and the default nursing home program for many.
  • eligibility means you can have a house and basically $2000 to your name.
  • there is a 5 year lookback period for asset gifting.

So the idea behind Medicaid planning, at least for this "lunch lecture" was get assets out of Mom's name as quickly as possible (to avoid 5 year lookback) because she will spend everything on a future nursing home. And why do that when you can make yourself appear poor and have Medicaid pick up the tab?

So what are the issues? Number 1 was that this person was stressing out over what very well could be a non-issue. Mom had a Long Term Care insurance policy with a several year benefit and she was very healthy and independent. My first thought was that there would be a 90% chance that Mom's assets would be fine. Statistically, the average stay in a nursing home is not much over 2 years before someone passes away.

The Number 2 issue, was if Mom gifts assets to you - you lose the step up in basis which comes with inheriting assets. So your cost basis is the same as Mom's and could be a decent size tax bill.

The Number 3 issue, what if Mom gifts all of her money away to family members and then decides she wants or needs money? Are the family members going to save it for her? And what happens when Mom gives away her money to kids and the kids get divorced, get in a lawsuit (sued) or blow it in Vegas?

Summary: The purpose of this was to simply share with you an issue that you may have to confront one day. As with all financial issues you can logically plan around them or do things spontaneously and suffer the consequences later.




For all of you economists out there, here is your Fed Reserve update:

The Financial Planning Association of Georgia hosted an Economic update meeting recently with guest speaker, Dr. Paula Tkac - Senior Economist with the Atlanta Federal Reserve.

The event was entitled "A Challening Economic Environment" (I guess that sort of sums up the presentation!)

There were basically a couple of key items that the Fed views as challenging at this juncture: Housing prices (not going up), Small Business uncertainty (scared to hire), a jobless economic recovery and Euro Debt crisis. I guess that would be the obvious issues that anyone would be concerned with!

The problem is that while they have seen signs of growth, this recovery (if that is what it truly is) is very different from the strong growth and hiring seen coming out of other recessions.

Here is the powerpoint slide show for you number junkies!

Next Month:

Do you have a question or topic? Hit the contact button above and send me an email. I can address a topic for the newsletter or answer individually.


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.