Inherited IRAs: What You Need To Know

 If you are the beneficiary of an IRA, it’s important to know what options you have.

Your options will depend on your relationship to the deceased. There are different rules for spouse and non-spouse beneficiaries.

For A Spouse

As a spouse, you have a few options available when you inherit an IRA:

Option 1 – Cash it out

You can cash out the IRA.  The IRS loves when you do this!  And why?  Because they collect taxes.  All the money you withdrawal will be taxed as ordinary income.  The bigger the IRA, the bigger your income, the bigger the tax hit is likely to be.   This probably isn’t your best option.

Option 2 – Make it your own IRA

This seems easy.  Make the IRA your own, and go on your way.  You can even combine this with other IRA’s (if you have them).  But you’ll want to understand all your options before making this decision.  Because once a decision is made, there is no going back.

Option 3 – Make it an inherited IRA

Choosing to make an IRA an inherited IRA can provide you additional flexibility.  What does this mean?  With an inherited IRA, you may be able to access your money penalty free prior to age 59.5 (something you cannot do with your own IRA).  You can also delay taking required minimum distributions (RMD’s) until the deceased would have been 70.5 years old (benefiting from continued tax deferral).

Specifically, you may want to consider an inherited IRA if you fall into one of the following scenarios:

  1. You are under 59.5 years old, and need access to the money sooner rather than later.
  2. You are older than your deceased spouse and are looking to delay RMD’s as long as possible.
  3. Making it an inherited IRA isn’t all good though, the Supreme Court recently ruled that inherited IRA’s are not protected from bankruptcy.

    Option 4 – Make it a ROTH IRA

    The longer you have a ROTH IRA, the better it tends to get.

    Why?  Because the money can be invested.  And all the growth you earn will be tax-free (as long as the funds have been invested at least 5 years)!  The more growth, the more tax-free money you have.

    But keep in mind, investing does carry with it risk that your account can go down in value (buzzkill!).  Also important, in the year you convert your IRA into a ROTH IRA, you are going to pay taxes.  Potentially a lot in taxes.  The IRS will tax you on the amount you convert as ordinary income (ask your accountant!).

    Bottom line – ROTH conversions make sense if you don’t need the money for the foreseeable future.

    For A Non-Spouse Beneficiary

    Options for a non-spouse beneficiary are similar.  The biggest differences are:

    1. You cannot make it your own IRA.
    2. The rules for an inherited IRA are different.

The rules for inheriting an IRA from someone other than their spouse differ.

Two of the biggest differences are:

  • You cannot make contributions.
  • You cannot rollover over the account into an account in your own name. You must title the account in both yours and the name of the original owner.

Beneficiaries generally have three options:

  1. Take distributions over their life expectancy
  2. Take distributions within 5 years
  3. Take a lump sum distribution

 Inherited IRAs Financial Planner in Buffalo NY and Tampa Florida

Let’s Sum This Up

There is A LOT to know when it comes to inheriting an IRA.

This is a perfect example of a time to look into hiring the services of a good  fee only financial planner for a one-time fee.

One mistake, for example, making an incorrect transfer, could lead you to pay taxes this year on the entire amount.

So, it’s important you learn the general Inherited IRA rules. Then, sit down with a qualified financial planner to assist you.

Schedule a free meeting in Buffalo NY Call our office at  716-565-1300

In Tampa Florida call our office  813-964-7100

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