10 Things You CAN and CAN’T Do With An Inherited IRA

Receiving an Inherited Individual retirement account (IRA) can come with a mix of emotions, gratitude for the legacy left behind, along with confusion about how to manage the account according to the tax laws and regulations. If you’ve recently inherited an IRA, it’s crucial to understand what you can and can’t do with it. Here’s a comprehensive guide to help you navigate the complexities of an Inherited IRA.

10 Things You CAN Do with an Inherited IRA

1. Withdraw Funds: As a beneficiary, you have the right to withdraw funds from the inherited IRA. However, be aware that withdrawals are typically taxable as income.

2. Transfer to a Beneficiary IRA: You can transfer the inherited IRA into a Beneficiary IRA, which allows you to stretch distributions over your lifetime based on your life expectancy, if you’re an eligible designated beneficiary.

3. Choose Your Payout Option: You can generally choose how you want the funds distributed – either as a lump sum or through a series of distributions over time (depending on your relationship to the deceased).

4. Keep the Account in the Deceased’s Name: Unlike a traditional IRA, you can keep the inherited IRA in the deceased person’s name and take distributions when necessary. This can sometimes provide tax advantages.

5. Contribute to the IRA: As a beneficiary, you cannot contribute any additional funds to the inherited IRA. However, you can manage the investments within the account.

6. Convert to a Roth IRA: You may convert the inherited traditional IRA into a Roth IRA, potentially allowing for tax-free growth and withdrawals in the future, depending on your tax situation.

7. Manage Investments: You have the ability to manage and invest the assets within the inherited IRA account. This gives you control over how your investments perform.

8. Keep Investment Growth Tax-Deferred: Any earnings in the inherited IRA will continue to grow tax-deferred until you begin taking distributions.

9. Use Non-Spousal Rollovers with Caution: If you are a non-spouse beneficiary, you can roll over the inherited IRA into an inherited IRA or Beneficiary IRA. However, you must follow the specific rules set by the IRS to avoid penalties.

10. Seek Financial Advice: It’s always advisable to consult with a financial advisor or tax professional for guidance on managing an inherited IRA, especially considering the possible tax implications.

10 Things You CAN’T Do with an Inherited IRA

1. Change Ownership: You cannot change the ownership of an inherited IRA into your name. The account must remain an inherited account until it’s fully distributed.

2. Make Additional Contributions: Beneficiaries cannot contribute to an inherited IRA. The account is only for the funds inherited and any growth thereon.

3. Claim Early Withdrawal Penalties: Although inherited funds can be withdrawn, the 10% early withdrawal penalty for individuals under age 59½ does not apply to inherited IRAs, so you won’t face penalties but will owe income tax.

4. Treat as Your Own: You cannot treat the inherited IRA as if it were your own traditional or Roth IRA, which means you don’t gain any of the same privileges like new contributions and loans.

5. Avoid Required Minimum Distributions (RMDs): Depending on your relationship to the deceased and the year of their death, you are required to take RMDs from the inherited IRA. You can’t simply leave the funds to grow indefinitely.

6. Neglect Tax Implications: All withdrawals from an inherited IRA are subject to income tax. Neglecting to consider the tax implications can lead to surprises during tax season.

7. Ignore Beneficiary Designation: If you inherited an IRA, you are bound by the terms of the beneficiary designation. You cannot change the designated beneficiaries listed on the account.

8. Delay RMDs Indefinitely: If the original account holder passed away after December 31, 2019, and you are not an eligible designated beneficiary, you cannot delay your distributions indefinitely. The IRS requires payouts within a certain timeframe.

9. Forget About State Tax Laws: Some states have different tax rules regarding inherited IRAs. Ensure you review both federal and state tax implications.

10. Make Decisions Without Planning: Managing an inherited IRA is complex. Failing to plan or seek advice can lead to costly mistakes, including tax penalties.

Conclusion

Managing an Inherited IRA requires a clear understanding of the associated rights and restrictions. While inheriting retirement accounts offers financial benefits, it also presents certain responsibilities and rules that must be adhered to. By educating yourself on these do’s and don’ts, you can ensure that you maximize the benefits while minimizing any potential pitfalls associated with your inherited IRA. Always consider consulting a financial advisor to tailor a strategy that fits your specific situation.

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA