by Archie M. Richards, Jr.
March 5, 2007

In my year end review, I predicted weakness in stock prices during the first few months of 2007, but excellent gains for the year.

Well, we're getting the weakness, all right. But pay it no mind. Long-lasting bear markets - the ones to worry about - begin gradually. Abrupt and rapid drops, like we're seeing now, are generally temporary reversals. Just keep buying and holding.

Some $23 trillion of investments is controlled by baby boomers and their parents. Within the next couple of decades, the bulk of this wealth will be transferred to new ownership. Because of ignorance, neglect and, most importantly, a tax code far too complicated, too much of the wealth will go to the IRS.

Here are tax mistakes to avoid:

• Your will has no control over the inheritance of your IRA. Instead, name beneficiaries in the IRA itself. Contact the custodian and make sure the names you want are correct. (For more about this, see for columns dated 4/24/06 and 12/11/06.)

• Specify the beneficiaries even if you inherit an IRA. With no one named, the IRA goes to your estate. The required minimum distributions are higher for estates than they are individuals named in the plan. (The IRS's minimum withdrawal rules, by the way, are a headache. See the abovementioned columns and IRS Publication 590 (www.irs.gov/pub/irs-pdf/p590.pdf). Vanguard's Retirement Center [800-205-6189] can also assist.)

• If you inherit an IRA, leave the money in the plan to grow in a tax-free environment. Unless you have an urgent need for cash, remove only the required minimum withdrawals. The investments recommended in the "Suggested Portfolio" section of my website are likely to grow faster than the rate at which money must be withdrawn. You'll have an ever-growing accumulation of wealth to use later or to pass on to your heirs.

• As you know, withdrawals from an IRA are generally subject to ordinary income tax in the year of the withdrawal. But here's something many people miss: If you inherit an IRA from someone who paid a federal estate tax on it, you can deduct a portion of your withdrawals. The deduction has a funny name: Income in Respect of a Decedent.

  Let's say that half of the federal death tax paid by the estate of the IRA's original owner was attributable to the IRA. Bingo, you can deduct half of your withdrawals. Over a period of years, this could save you plenty. The deduction is often overlooked because the tax advisors of IRA beneficiaries are usually different from the tax advisors of the original owners and their estates. Many thanks to Congress for making tax rules too complicated to follow correctly.

• I repeat the recommendation made recently in this column. If you hold a significant amount of your employer's stock in a 401(k) plan, you probably shouldn't roll it over to your IRA at retirement. The money you or your heirs withdraw from the IRA is taxed as ordinary income up to the maximum rate of 35 percent. Instead, request that the stock be transferred to your brokerage account and held in your name. You'll pay tax currently at ordinary rates, but only on your cost. The appreciation is taxed as you sell the stock, but at the maximum rate of only 15 percent - probably a significant savings.

• Finally, if you inherit money you don't need, consider disclaiming it. You can't specify who receives the money; it passes to whomever would have received it had you predeceased the original owner. But let's say you're the primary beneficiary of an IRA and your children are the secondary beneficiaries. If you disclaim, the assets pass directly to the children and avoid being taxed in your estate.

Baby boomers, their parents, and their progeny soon face taxes on the transfer of huge amounts of property. Wherever possible, take advantage of favorable tax rules.