Unlike other assets or financial accounts you might inherit, an IRA presents some unique inheritance planning opportunities. Think of it as a vehicle on a crash course at the three way intersection of estate planning, retirement planning, and tax planning. You need to consider each of these or you could be faced with some potentially expensive mistakes. One of the key features of a retirement account is the ability to grow assets tax deferred over time. This feature can be taken advantage of for years, if you adequately plan for what women need to know about inheriting an IRA.
Once you learn of your inheritance, stop and call your financial adviser. Don’t make any decisions without first discussing all your options with them. If, for example, you decide to cash out the plan, you could be faced with a substantial tax bill at the end of the year. Once you make the wrong decision it’s often too late to go back and change your mind.
Inheriting an IRA from a Spouse
If you are the surviving spouse, you have more options than any other heir. There are three options to consider:
- you can roll the IRA into a new account in your name,
- you can retitle the IRA as an Inherited IRA, or
- you can keep the IRA in your deceased spouse’s name.
If you decide to roll the account over, it will be as though the funds were always yours. You can continue to grow the account and make the regularly scheduled withdrawals based on your age and life expectancy. If the IRA is traditional, you will have to pay income taxes on the funds withdrawn. If it is a Roth, those funds can be withdrawn tax free as long as certain criteria have been met. Penalties and fees would apply if you chose to make early withdrawals subject to IRS regulations. Should you decide to leave the account in your late spouse’s name, withdrawals would then be scheduled based his age and the year he would have reached the age of required minimum distributions.
Retitling the account to an Inherited IRA may allow you to make withdrawals without penalties or fees. The requirements for retitling are very specific. If done incorrectly, you could be faced with penalties and lose much of the tax saving benefits of a retirement account.
Once the account is in your name, you can then name new beneficiaries. You may wish to name your children, another relative, or a close family friend. If any funds remain in the account at the time of your death, you then pass on the tax deferred growth potential to your heirs.
Inheriting an IRA from a Non-Spouse
If you are inheriting an IRA from someone other than your spouse, you are not permitted to roll it over into your retirement account. You must choose to either retitle it as an Inherited IRA or you must take full distribution of the funds with five or less years. If you decide on the five year option, you must completely liquidate that account within five years of the original owner’s death. For substantial accounts, this could have significant income tax implications. By choosing to retitle the account as an Inherited IRA, you must take your first required distribution by December 31 of the year following the death of the original owner. After that, minimum distributions are calculated based on your age and life expectancy. At that time, you may name beneficiaries and potentially pass the tax deferred benefits to your heirs.
There are other planning considerations that may be involved with inheriting an IRA. It is best to evaluate the best course of action within the context of your comprehensive Wealthcare plan. If you have any questions about inheriting an IRA or other retirement account, please contact me and let me know if I can help or serve as a sounding board for you.
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