What is the Best Thing to Do With an Inherited IRA?
When inheriting an IRA, there are multiple choices that each have their own set of rules and tax implications.
Your decision will depend on your relationship to the deceased and their estate plan, and whether or not you are designated beneficiary. Speaking with an advisor can help clarify all available options and their potential ramifications.
Assume Ownership
Dependent upon your relationship with and age of the deceased account owner when they passed, different solutions exist for dealing with an inherited IRA. Consult a financial or tax advisor on potential solutions before making your decisions.
As an example, a spouse can roll over IRA proceeds without incurring taxes and penalties, provided they abide by the same RMD requirements as the original IRA owner. However, should this occur, any required minimum distribution rules would also need to be adhered to.
Beneficiaries have the option to disclaim an IRA, meaning they don’t want any distributions from it, however this decision must be made within nine months after the original account owner dies and will go directly into their estate if no other beneficiaries were designated. This choice may be particularly suitable for financially secure beneficiaries who don’t require extra income but it must also be noted that it could have significant ramifications should they later change their mind.
Roll Over to Your Own Account
If you are the spouse or beneficiary of the original account owner, or eligible nonspouse beneficiary of their estate, an inheritance can be placed into an IRA in your own name to allow tax-deferred growth of its principal amount over many years to come.
Ultimately, if this strategy sounds appealing to you, be sure to work closely with both a financial advisor and estate planning attorney in coordinating both of your plans. Your advisor can help guide your understanding of its options and complexities.
Some experts advise coordinating inheritance IRA distributions carefully to minimize taxes and maximize potential tax-deferred growth. This approach may prove particularly advantageous when dealing with beneficiaries with variable income streams – for instance a real estate agent might experience great years in 2021, followed by less lucrative ones in 2022-2023. It can also reduce taxable events like RMDs and early withdrawal penalties – so be sure to speak to your advisor for tailored guidance tailored specifically to your circumstances.
Take a Lump-Sum Distribution
If you want immediate access to the funds in an inherited IRA, a lump-sum distribution may be the right solution; however, this could result in a substantial income tax bill if you’re under 59 1/2 and will also not allow you to take advantage of the 60-day rule (allowing transfers without incurring tax bills).
Withdrawals from an inherited IRA can provide tax-efficient retirement income. To optimize the strategy for yourself, work closely with a financial expert.
Inherited IRAs differ from regular IRA accounts in that upon their owner’s death, you become their beneficiary, subject to special withdrawal rules that must be adhered to. This is especially relevant if you were not married to the deceased individual; given how complex these rules can be it would be wise to consult an advisor beforehand.
Disclaim the Account
IRA beneficiaries have the option to forgo all or part of their inheritance, which is known as disclaiming assets. Doing this gives family members more control over where the money goes by either keeping it themselves, passing it along, or accepting another beneficiary claimant. Before making this decision it would be prudent to consult a financial advisor first due to complicated rules and tax consequences associated with disclaiming assets.
An inherited IRA offers you decades of tax-advantaged compound growth, but decisions regarding it can be complex. Your decision should depend on factors like age, retirement date and financial needs – in most cases nonspouse beneficiaries must take distributions over a 10-year period or face massive income taxes – so take care when making this choice! Depending on the circumstances surrounding you may opt to assume ownership or roll the funds into an inherited IRA account or opt out altogether depending on which option best fits. Each strategy comes with its own complexities associated with decisions on this decision making process!
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