June 21, 2024

What To Do with an Inherited IRA

inherited IRA

Posted by Beacon Financial Plus
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  1. inherited IRAGet help from a professional. The decisions to be made involve estate planning, financial planning and tax planning.  Mistakes are almost impossible to correct and the wrong decision can lead to expensive consequences.
  2. Choose the five-year rule or “stretch” IRA.  Non-spouse beneficiaries have these two options. They can take distributions over their life expectancy – the “stretch” IRA. If this is not done, the funds must be withdrawn within five years of the original owner’s death. If the IRA contains substantial funds, this could be very expensive. The withdrawals are not subject to penalty, but they are fully taxed as additional income-possibly pushing you into a much higher tax bracket. (Distributions from an inherited Roth IRA will be tax-free unless the account was established less than 5 years before the death-in which case the earnings may be taxable.)
  3. Spouses have the best benefits, but still need to be careful. Spouses can roll over the IRA to their own accounts – delaying any taxability until they’re ready to start distributions or required to because of age. The only bad thing about this is that the inherited IRA is now subject to same early distribution penalties as if it were always theirs (10% penalty tax).
  4. Non-spouse beneficiaries must not procrastinate. In order to choose the stretch option, yearly required minimum distributions (RMDs) must start no later than December 31 of the calendar year following the year that the decedent died. Many of the companies that hold the IRAs also have their own time tables for making the elections. Pay attention to paperwork you receive and ask questions when you don’t understand something.
  5. Don’t ignore beneficiary forms. An incomplete or missing beneficiary form can ruin any estate planning that may have been done. If there is no designated beneficiary and the account goes to the estate, the beneficiary must use the five year rule. If not sure, check before it’s too late. Don’t assume you filled out the form correctly.
  6. Not all IRA custodians are equally knowledgeable in this area. Ask lots of questions. Don’t be afraid to seek a second opinion when you’re not sure you understand what’s being agreed to. Do not sign paperwork you do not understand. If the custodian makes a mistake, the IRS doesn’t care and you are left with the fall out and sometimes penalties and interest which the custodian likely won’t pay.


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