6 Tips When Inheriting IRAs
By: Solid Serenity Legal Solutions
When you inherit an IRA, your decision about what you do with that inheritance can lead to costly consequences. You have several options for what to do with your inheritance, and the consequences of those choices change depending on (1) who left you the inheritance, (2) whether the owner was required to take minimum required distributions, and (3) whether your goal is to maximize cash distributions or minimize taxes on the IRA.
Here are 6 tips when inheriting IRAs to help you decide what to do with your inheritance.
(1) Spouses Have the Most Flexibility
If you inherit an IRA from your spouse, your options include:
- Naming yourself as an owner
- Rolling over the inherited IRA into your own account
- Acting as the beneficiary of the IRA
Each option opens you up to additional choices and considerations. For instance, if you treat the IRA as your own, depending on your age, you may be required to take minimum distributions.
If a spouse chooses to rollover the IRA into his or her own account, he or she can treat the IRA entirely as his or her own.
The IRS has specific rules for each option you can take, so be sure to speak with a financial advisor before acting.
(2) Consider a 5-Year or “Stretch” Option for Non-Spouses
If you are inheriting an IRA from someone who isn’t your spouse, your options are more limited. You can (1) take distributions over your life expectancy- or “stretch” them out- and leave the money in the IRA, or (2) fully liquidate the IRA within 5 years of the owner’s death.
The stretch option allows the beneficiary to avoid paying taxes on the IRA while it continues to grow. Whereas, the 5 year rule requires taxes to be paid on the amount taken from the IRA. Talk to your trusted advisor to see which option is best for you.
(3) Decide Quickly
If you choose the stretch option, you will be required to take minimum required distributions based on your life expectancy. You must take the distributions by a set time and that time depends on the age of the owner. Generally, if the owner was under 70 1/2, you will need to take distributions by Dec. 31 of the year the account holder would have turned 70 1/2. If the owner was over 70 1/2, you might have to take a distribution by the end of the year of the owner’s death if the owner did not take a distribution that year.
Be sure to consider and discuss your options, but don’t waste time getting started.
(4) Pay Attention to the Owner’s Minimum Required Distributions
When you inherit an IRA from someone over the age of 70 1/2, it is your responsibility to insure the owner’s required minimum distribution for the year has been met. If you don’t take the required minimum distribution, you could be penalized for up to 50% of the amount that wasn’t distributed. December 31 is the deadline to take required minimum distributions.
(5) Fill Out the Beneficiary Forms
Make sure all beneficiary forms are up to date, properly filled out, and on file with the proper company. If you do not have beneficiaries properly named, the IRA account may have to go through probate in your state of residence’s court. The probate process is lengthy, costly, and can cause problems for your heirs with meeting required minimum distributions.
(6) Update and Review Trust Documents
You can list a trust as a beneficiary of an IRA. However, there may be tax consequences to doing so if your documents aren’t properly drafted. Make sure you have an estate planning attorney on your side who is experienced and knowledgeable if your trust is the beneficiary of your IRA.
Call us today to review your plan to make sure it still fits your needs and goals.