Inherited IRA Options
1. If you inherit a retirement account from your spouse, you can transfer the assets into a retirement account of your own. Rules about when and how you can take the money (distribution rules) are the same as if the account had always been yours.
2. Typically you transfer the money to an Inherited IRA, if you inherit from someone other than a spouse, but spouses can also open an Inherited IRA. The money in an Inherited IRA can continue to grow tax deferred, and you can generally start withdrawing it immediately without paying a penalty. You’re required to withdraw specified amounts (known as Required Minimum Distributions, or RMDs).
3. You can choose to take all the money now. The money from the inherited account may be taxable income depending on the type of IRA and whether the contributions were pre-tax or post-tax. Taking a taxable distribution all at once may push you into a higher tax bracket. If you choose to take all the money now, an Inherited IRA will be opened in your name to ensure that tax information is correctly reported to the IRS, and then you can choose to take the money in a single lump sum.
4. If you prefer to allow the assets to pass to alternate beneficiaries—perhaps to avoid tax implications—you can choose to “disclaim” the account. To do so, you need to act within nine months of the original owner’s death and before you’ve taken possession of the assets. Make sure you speak with your tax advisor to determine if this or one of the other options may be right for you.
Important to Know
Who inherited the account?
- An Individual
- A Trust
- An Estate
What type of account was inherited?
- Traditional IRA
- Roth IRA
- Qualified Retirement Plan
What is the age of the deceased? (determines required minimum distributions)
What was the decedent’s basis in the account? (after tax contributions, life to date, for the entire account history)
Once you have this information, it is helpful to discuss your options and requirements with a tax advisor to insure you understand the tax implications and have prepared for your required minimum distributions to avoid tax penalties.