What is the Best Thing to Do With an Inherited IRA?

Beneficiaries of an inherited IRA must make difficult decisions regarding how best to handle their inheritance. Working with a financial professional who specializes in such accounts is usually advised.

Understanding your options and requirements is paramount; taking a lump sum distribution could increase your tax liabilities while jeopardizing future opportunities for tax-deferred growth.

Roll it Over

Assuming you are the Surviving Spouse of an individual who passed away, they can transfer an inherited IRA to your account at the same financial institution so you can continue the tax-deferred growth of it. Once done, required minimum distributions (RMDs) should begin by December 31 of the tenth year following their death or spread out over your lifetime.

However, making a lump-sum withdrawal increases your taxable income for that year and could push you into a higher tax bracket. A trustee-to-trustee transfer allows an inherited IRA to move from its original financial institution to another – it is best done using a financial firm with experience handling these types of transfers to ensure they go smoothly without incurring penalties and can allow compound growth potential to take full effect.

Take a Lump-Sum Distribution

Inherited IRAs present many challenges. Adherence to IRS rules must be observed, while any mismanagement could incur substantial tax liabilities. With careful planning and assistance from an experienced financial advisor, however, you can minimize taxes while building an asset-rich future for yourself and your loved ones.

Spouse beneficiaries may opt to roll an inherited IRA into their personal accounts and treat it as their own; non-spouse beneficiaries, on the other hand, must take required minimum distributions over 10 years, regardless of age. They can use either required minimum distributions or the life expectancy withdrawal method instead, which weights distributions during lower income years so as to not bump them up into higher tax brackets.

However, if you opt for the life expectancy withdrawal method, at least the minimum required by your age as stated on the IRS Single Life Expectancy table by Dec. 31 of the year following original account owner’s death is due and should have been withdrawn by then; failing to do so results in a 50% penalty being assessed against what should have been withdrawn.

Disclaim the Inheritance

As is true of any inheritance, it’s crucial to fully understand your options and their impact on any potential distributions based on factors like your relationship to the account owner, their age at death and whether or not they had begun taking required minimum distributions (RMDs). A financial professional with expertise in IRAs may help guide this process for you.

If the next beneficiary will likely benefit more from an IRA than you, consider disclaiming some or all of its assets to avoid incurring taxes and to pass along to them directly. But if disclaiming is your choice, remember that any disclaimer must take place within nine months from the original account owner’s death; spouse beneficiaries have slightly different rules. In either case, rollover into an existing account where minimum distribution rules and early withdrawal penalties still apply when making this transfer.

Take a Withdrawal

Heirs who opt not to roll their inheritance over into an IRA may take regular distributions from their inheritance account; however, any funds taken out must pay taxes.

Experts advise beneficiaries to do this in order to spread out their taxes over time and avoid taking an immediate tax hit, according to Natalie Choate of Create Wealth Financial Planning in Saint Johns, Florida. Choate’s firm specialises in financial planning.

When choosing an inherited IRA option, it is crucial that you collaborate with a certified financial planner or CPA who specializes in these accounts. An expert can guide you through all of the rules and regulations associated with such accounts as well as suggest investments tailored specifically for your situation and offer distribution schedule advice that makes sense for you. They may even help set up one at either its original institution or one of your choice.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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