MoneyDo: Consider What To Do If You Inherit An IRA

 

We’ve discussed the importance of beneficiary designations previously in MoneyDo. This week’s MoneyDo focuses on IRA beneficiaries: Consider what you should do if you inherit an IRA.

Simply put, you have to do two things when you inherit an IRA:

  • Make sure to properly title the asset as an Inherited IRA
  • Figure out how you want the IRA distributed to you. The penalty for not taking your required minimum distribution (RMD) is 50% of the required amount.

If you inherited an IRA from your deceased spouse, you have the option to take ownership of your spouse’s IRAs. Everyone else who inherits an IRA would have the following options:

If the owner of the IRA dies after reaching the age 70 ½ you could:

  • Transfer the assets into an Inherited IRA in your name. Then, you must begin taking an annual RMD over your life expectancy or the life expectancy of the deceased owner, beginning no later than 12/31 of the year following the owner’s death, or
  • Receive a lump sum distribution out of the IRA to yourself.

If the owner were to die before reaching the age 70 ½ you could:

  • Transfer the assets into an Inherited IRA in your name, then you must began taking an annual RMD (required minimum distribution) over your life expectancy beginning no later than 12/31 of the year following the owner’s death, or
  • Receive a lump sum distribution out of the IRA to yourself, or
  • Transfer the assets into an Inherited IRA in your name, and then fully distribute the funds out of the inherited IRA in the next five years (at any time up until 12/31 following the fifth year after the year in which the account owner died).
  • The first option in both scenarios is commonly referred to as a ‘Stretch IRA’ because it allows you to stretch the income out over your life expectancy. The ‘Stretch IRA’ is a great benefit which also allows you to continue to defer and spread the tax ramifications of your inherited IRA over numerous years.

Legislation currently being considered in Congress would radically change the Stretch IRA option. The Secure Act, a piece of retirement legislation that has bipartisan support (it passed by an overwhelming margin in the House), would force the distribution for a non-spouse who inherits an IRA within 10 years of the owner’s death.

As of the date we wrote this MoneyDo, the Secure Act hasn’t passed.

  • While available in both scenarios above, be careful of the lump sum option, since this would likely increase your tax bill the most.  

We created two flowcharts to give you a different vantage of the IRA Beneficiary process. Remember, these are published based on the options as of the current law, Annex is constantly monitoring proposed legislation that would change these options and will be sure to communicate any changes.

Inheritance Options Non-Spouse

Inheritance Options Spouse

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