by Archie M. Richards, Jr., CFP^®
July 11, 2005

In a surprise to many, stock prices will rise sharply by yearend.

An article in the current issue of BusinessWeek (7/18/05) reports the predictions of five market forecasters about where the market will stand at yearend. One of them says the S&P 500 Index will be 1225, only slightly higher than the 1212 current level. The other four say the S&P will end the year lower.

When the majority - even the majority of market experts - are pessimistic, you should be optimistic. Even the experts are usually wrong.

But the article also enables us to know what the readers think, not just the experts. Editors, you see, run stories they believe will attract readers. Readers who are optimistic want to read optimistic articles. Readers who are pessimistic want to read pessimistic articles. Editors are skilled at sensing what readers want. If the BusinessWeek reporter had interviewed five market forecasters who were raging bulls, the editor might have not have run the story.

But this bearish one he accepted, possibly because he senses that readers would agree with it.

Editors know the mood of their readers. The BusinessWeek article indicates that investors today are pessimistic. Since the majority is usually wrong, we can assume that the last six months of this year will be eye-poppers on the upside.

The property in your IRA will probably outlive you. Pay attention to its inheritance.

First, don't expect the IRA to pass to the persons named in your will. You should have a will, of course, but no matter what it says, it doesn't control the inheritance of your IRA.

Instead, the IRA passes to the beneficiaries named in the designation form of the IRA itself. If the designations made years ago are not as you currently wish, change them. If you've remarried, for example, run, do not walk, to change the beneficiary from your former spouse to your current one.

Name two levels of beneficiaries. "Primary" beneficiaries are those you wish to inherit the IRA at your death. "Contingent" beneficiaries are those who inherit if the primary beneficiaries die before you do. Many people name their spouse as primary beneficiary and their children as contingent beneficiaries. (Special rules apply to spouses: They can treat the inherited IRA as their own and even make contributions to it.)

Here's the main point: Do not name your estate as beneficiary of your IRA.

This illustrates why: George dies at age 89. A widower with no children, he names his niece Jackie, 48, as beneficiary of his estate. George also wants Jackie to inherit his $250,000 IRA. Deciding to "put the money in one pot," he makes his estate the beneficiary of the IRA.

Wrong move. At George's death, the IRS requires that Jackie withdraw the funds in only six years, this being George's life expectancy had he not died at 89. Assuming the IRA grows at 7 percent and Jackie withdraws the minimum each year, her withdrawals total $320,000, all taxable to her as ordinary income.

Now assume that George does it right: He names Jackie as primary beneficiary of the IRA itself. After George's death, Jackie can then use her own life expectancy to determine how long withdrawals can continue - 36 years, until Jackie's 83rd year. Assuming 7 percent annual growth, her withdrawals exceed $1.1 million. Jackie can withdraw more than the minimum at any time. But minimum withdrawals enable the money to grow tax free for longer and may avoid pushing Jackie into a higher tax bracket.

Assume that Jackie does not attain her life expectancy of 83, but dies at 73. If she fails to name someone to inherit George's IRA, it terminates at her death and goes to her estate. Whoever inherits the money pays ordinary income tax on the full amount in that year.

Instead, Jackie names her daughter as subsequent beneficiary of the IRA. Withdrawals to the daughter can then continue for 10 years, just as they would if Jackie had survived to 83.

IRS rules are ridiculously complicated. If you don't stay on top of them, you can lose out.