What is the Best Thing to Do With an Inherited IRA?
Beneficiaries have various options when inheriting an inherited IRA depending on their relationship to the original account owner. Non-spouse beneficiaries must take required minimum distributions (RMDs) within 10 years or exhaust the account entirely.
Establishing a plan can assist beneficiaries in making informed, long-term decisions that align with their desired outcomes.
Roll it Over to Your Own IRA
If the original account owner had taken required minimum distributions, their heirs can roll their inheritance into their own IRA to continue growing tax-free while spreading any potential taxes due into manageable pieces over a longer period. Alternatively, they might consider converting it to a Roth.
Before making any decisions about an inherited IRA, it’s wise to consult a financial professional. The complex rules associated with inheritances can have serious ramifications if not carefully navigated; beneficiaries could potentially avoid paying an early withdrawal penalty by stretching out withdrawals over their life expectancies; however, doing so might cause them to shift into higher tax brackets and incur more taxes overall – therefore working with an advisor is vital in receiving your inheritance efficiently.
Take a Lump Sum Withdrawal
If you are the spouse of the original account holder, one option available to you is rolling over their inherited assets into an IRA and treating them as though they had always belonged to you. This choice provides greater flexibility if you are aged 59 1/2 or over as it allows withdrawal without incurring penalties or entering higher tax brackets.
Rolling over an inherited IRA could rob you of years of tax-deferred growth and limit access to the money immediately.
One option for withdrawal of an inherited IRA is taking a lump sum withdrawal and paying income taxes on its taxable portion. This may be beneficial if you need to cover high-interest debt quickly or are looking to deplete it all within 10 years after its original owner dies. Regardless of which decision is made, working with an experienced financial advisor who specializes in inheriting IRAs would be recommended.
Disclaim the Inheritance
Assuming ownership of an IRA can be complex and requires professional advice to properly utilize your inheritance. When in doubt, always consult a tax specialist.
Beneficiaries typically opt to transfer an inherited IRA to their own name and use the life expectancy method of withdrawals – this allows funds to continue growing while also minimizing taxes and possibly avoiding penalties.
However, non-spouse beneficiaries may be unable to do this. If they take a lump sum distribution from an inherited IRA and withdraw it within 10 years, they will be taxed at their ordinary income tax rate and possibly lose out on part of their inheritance.
Transfer the Inheritance to an Alternate Beneficiary
IRAs acquired through inheritance can be highly complex. If the original account owner was married, their spouse can roll it into their own IRA and distribute over either their lifetime or that of their deceased loved one; this can provide substantial tax advantages.
Non-spouse beneficiaries typically must empty an inherited IRA within 10 years after its beneficiary passes away, with certain exceptions applying. It’s therefore crucial for these non-spouse beneficiaries to update their beneficiary information with the IRA custodian to meet this deadline.
Your choice regarding an inherited IRA depends on your particular needs and circumstances, so consult a financial professional about them as soon as possible. Incorrect or outdated beneficiary information has led to numerous lost funds and costly legal battles; you can avoid this with regular updates of beneficiary records.
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