Wednesday, July 18, 2018

Inherited an IRA - What Are Your Options?

If you inherit an IRA from a parent or sibling, writes Eric Vogt in Forbes, you probably have many questions:
  • What options do I have for taking distributions?
  • What are the tax implications?
  • How do I incorporate this inheritance into my existing financial plan?
Two things you can't do:
  1. roll the inherited IRA into your own existing IRA
  2. continue to defer tax until your own age 59 1/2
Things you can - or must do:
  • Roll over the inherited assets into an inherited IRA in your name.  The account would be titled as follows: "Your Parent's Name, Deceased for the benefit of Your Name, Beneficiary".
  • Begin taking required minimum distributions by Dec. 31 of the year following the original owner's death (however, if the person who died was 70 1/2 or older, any Required Minimum Distributions due prior to or during the year of the rollover must be taken out right away).  If you leave the money in the account, but fail to take the necessary distributions, there is a 50% tax penalty.
  • Distributions in excess of your share of your Required Minimum Distributions must first go into an inherited IRA.  All distributions you take will be included in your gross income for tax purposes.
There are three ways to take cash distributions:
  • All at once (lump sum) - you will pay income tax on the entire amount.
  • Over five years - there will be no penalty, but you will pay tax each year on the amount withdrawn.
  • Over the course of your own life expectancy (using the Required Minimum Distribution table based on your age and on a percentage set each year by the IRS. 
"An IRA's greatest gift is long-term tax shelter," writes Jane Bryant Quinn in AARP. "The tax-sheltered growth of these investments could continue for years, even for decades," she explains, coming down on the side of heirs deferring tax on inherited IRAs as long as possible.

Correct titling of the account is critical. At Geyer Law, we often meet with the beneficiaries of our estate planning clients, helping each beneficiary select the best course of action given his or her own financial situation.

If you inherit an IRA from a parent or sibling, it's important to know the things you can't do, the things you can do, and the things you must do to make the most out of your legacy.

 - by Rebecca W. Geyer

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