Inheriting an IRA brings a lot of questions. This week, the Wall Street Journal has a good article with some things you should consider if you’re inheriting an IRA. Usually, you will be inheriting an IRA as a beneficiary. Hopefully, the owner of the IRA created an estate plan (a will, trust, etc.) and used beneficiary designations. These designations can be used to lower the amount of the probate estate. The lower the estate value, the less likely that an estate tax will factor into the distribution of the estate. If you are inheriting an IRA, as the Wall Street Journal points out, the rules are different between spouses and nonspouses.
If you are inheriting as a spouse, you have more options. One of the simplest and easy ways is to retitle the IRA under your name and social security number. You can also roll it over to an IRA in your name (a new one or an existing one) within 60 days. A big advantage a spouse has is that if they are under 70 1/2, then they can let the IRA assets grow tax-free until they reach that age. If they are under 59 1/2, they can even take distributions before they reach that age without a penalty. This can be done by retitling the IRA as an inherited IRA.
I know I seem to preach about it in almost every article I write, but this is another example of when a financial advisor is worth their weight in gold. They can help you be sure that you are maximizing the best use of an inherited IRA. Especially if you are under 59 1/2, they can give you some pretty important advice. Is it better to take distributions now? Or should you let the IRA grow until you reach 70 1/2? These are highly individual decisions. Someone who knows your financial situation best can help you make an informed decision.
Nonspouses have fewer options and must be more careful. They can’t simply retitle the IRA as their own. And if you attempt to just take the money and close the account? You’re looking at a big tax-hit! And you can’t just “put the money back” to try and undo your mistake.
If you inherit an IRA, then you need to retitle the IRA as an “Inherited IRA” and follow certain rules. No matter your age, you must start taking required minimum distributions by December 31 of the year following your inheriting of the IRA. The IRS publishes a table that lays out the required distributions based upon your age. If you don’t take the distributions on time? You’re looking at a 50% penalty…
Another reason a financial advisor can be helpful? You can use a “stretch” to designate your youngest child or grandchild as the beneficiary. This will lower the required minimum distributions. But there are proposed changes in Congress that may alter and limit those advantages. So, especially if the Secure Act is passed, a financial advisor will be able to help you navigate the best options for that IRA you inherited.
Have you checked your beneficiary designations recently? Now is a good time to check and make sure they are up to date. And, if you don’t have a will yet, or if you have one that you may need to update, call my office to set up a Legal Strategy Session and we can review the best options for you – (877) AMAYERS.