Inheriting an IRA can be a financial boon to a beneficiary. If the beneficiary is aware of all of their options when they inherit an IRA, they may be able to defer the tax implications of the IRA and further increase the financial benefits of the inheritance.
Today we are discussing traditional non-spousal inherited IRAs. This general information does not include IRA’s inherited from a spouse or Roth IRAs.
Depending on the decedent’s age when they passed away, a few options exist for the treatment of the IRA. An account owner over 70 ½ must begin receiving required minimum distributions from the IRA by April 1 of the year after he or she reaches age 70 ½. If the decedent had already reached their required beginning date for minimum distributions, a designated beneficiary has two options with the inheritance:
1) Take a lump-sum distribution of the entire balance or
2) Take annual minimum distributions based on the beneficiary’s single life expectancy or, if longer, the owner’s remaining single life expectancy
If the account owner died before reaching the required beginning date, the beneficiary has a third option of withdrawing all of the funds in the IRA account by the end of the year containing the 5th anniversary of the decedents death.
Taking a lump-sum distribution may incur a sizable tax bite. The ability to stretch the distributions over several tax years can often result in less tax being paid overall. It also provides an opportunity for the investments within the IRA to continue to grow, creating wealth for the beneficiary.
The rules surrounding inherited IRA’s are complex and may vary depending on circumstances such as whether or not the beneficiary was a designated beneficiary. In addition, there are a significant number of details such as the requirement to title inherited IRA’s correctly, meet certain deadlines, and take annual minimum distributions. Many of the rules surrounding inherited IRA’s are quite quirky and a single misstep could cause unintended tax consequences.
If you inherit an IRA the most important thing to do is to meet with a tax professional prior to taking any other action and make sure you understand all of the options available and how they impact your personal tax circumstances.
To find out more about inheriting an IRA or to discuss your particular situation, please contact us.