Inherited IRA: What To Do When You Receive One

Receiving an Inherited Individual retirement account (IRA) can be both a blessing and a challenge. While it’s a way to receive wealth from a loved one, navigating the rules and regulations of these accounts can be complicated. Understanding your options and the implications of inheriting an IRA is crucial for effective financial planning. Here’s a guide on what to do if you find yourself the beneficiary of an Inherited IRA.

What is an Inherited IRA?

An Inherited IRA is an account that you receive from a deceased individual’s retirement account. This can include traditional IRAs, Roth IRAs, or other types of retirement accounts. The rules regarding distributions and tax implications depend on several factors, including your relationship to the deceased, the type of IRA, and the age of the person who passed away.

The Basics of Inherited IRAs

1. Spouse vs. Non-Spouse Beneficiary:

   • Spouse Beneficiaries: If you inherit an IRA from your spouse, you have several options. You can treat the account as your own, roll it over into your own IRA, or continue to keep it as an Inherited IRA. If you treat it as your own, you can defer withdrawals until you reach the age of 72 (or 70 ½ if born before July 1, 1949).
   • Non-Spouse Beneficiaries: Non-spouse beneficiaries must open an Inherited IRA in their name. You cannot roll it over into your own IRA.

2. Required Minimum Distributions (RMDs):

   • If the account holder was already taking RMDs, you need to continue that schedule. If they weren’t, you’ll need to start withdrawals based on specific rules. With the SECURE Act changes implemented in 2020, most non-spouse beneficiaries must withdraw the entire balance of the Inherited IRA within 10 years of the account holder’s death.
3. Tax Implications:
   • Tax implications vary based on whether the inherited IRA was a traditional or Roth IRA. Distributions from a traditional inherited IRA are taxable as ordinary income, whereas qualified distributions from a Roth IRA are generally tax-free. It’s important to consult a tax advisor to understand how these distributions will affect your tax situation.

Steps to Take After Inheriting an IRA

1. Contact the IRA Custodian: Notify the financial institution managing the IRA of the account holder’s death. They will guide you on how to officially claim the account and any documentation you need to provide.

2. Choose How to Proceed: Decide whether you want to treat the IRA as your own (if you’re a spouse) or convert it to an Inherited IRA. Be sure to understand the ramifications of each option.

3. Understand Distribution Requirements: Familiarize yourself with the RMD rules and ensure you comply with the withdrawal requirements.

4. Consult a Financial Advisor: Given the complexities of tax regulations and inheritance rules, consulting a financial advisor or tax professional can provide clarity. They can help you devise an effective strategy that aligns with your financial goals.

5. Keep Records: Maintain careful records of all distributions taken from the inherited account. This will assist with tracking tax obligations and complying with IRS regulations.

6. Explore Investment Options: Depending on your financial goals, consider how to invest the IRA funds wisely. An inherited IRA can be a valuable tool for long-term growth.

In Conclusion

Inheriting an IRA can present both opportunities and challenges. It’s essential to take the necessary steps to understand your options, comply with IRS rules, and manage the account effectively. By doing so, you can ensure that you maximize the benefits of your inherited IRA while minimizing potential tax burdens and penalties. Whether you’re a spouse or a non-spouse beneficiary, taking control of the situation promptly will pave the way for a more secure financial future.

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA