Options for an Inherited IRA- Charles Schwab describes inheriting an IRA as a significant financial event with major benefits and significant potential tax liabilities. Before you inherit, you must understand your options to make the most of it.
When someone inherits a deceased person’s retirement account IRA or employer-sponsored retirement account, it creates an Inherited IRA. The beneficiary cannot make additional contributions, but the funds remain tax-deferred with penalty-free withdrawals. However, you must observe certain rules to maintain these benefits and avoid losing the funds. It’s usually necessary to withdraw all funds within 10 years.
If you inherit an IRA from your spouse, you have the unique option to treat the inherited IRA as your own. This means you can roll over the assets into a new or existing IRA of the same type (e.g., Roth to Roth). This approach can maximize tax-deferred or tax-free growth as you continue making contributions.
The SECURE Act and its recent updates have introduced new rules for required minimum distributions (RMDs). For most beneficiaries, you must fully distribute the inherited IRA within 10 years following the original owner's death. This rule applies to traditional, SEP, and SIMPLE IRAs, but Roth IRAs only have RMDs after the owner's death.
For spouses who choose to treat the inherited IRA as their own, the RMD begins after they reach a certain age. This age is currently 73, but will change to 75 in 2033.
Certain eligible beneficiaries, such as spouses, minors, and disabled individuals, may be able to take distributions over their lifetime. This can help manage tax liabilities and preserve the account's value for a longer period.
Options for an Inherited IRA
Inheriting an IRA comes with potential tax implications. Withdrawals from a traditional IRA are generally taxable, while Roth IRA distributions are typically tax-free if the account was open for at least five years. Consulting a tax advisor can help you understand how these rules apply to your specific situation. From there, you can plan the most tax-efficient strategy for taking distributions.
All beneficiaries may choose to withdraw the entire account balance at once in a lump sum distribution. While this might be tempting, it could result in a significant tax bill, depending on the account type and size. Spreading out distributions over time can often be a more tax-efficient strategy, preserving more of the account’s value for future use. On the other hand, a lump sum could go toward buying a home or other investments that justify the tax burden.
Planning how to handle an inherited IRA involves several steps:
If you have inherited an IRA, our estate planning attorney is here. Our legal team will offer guidance to help you understand your options and create a plan tailored to your needs. Contact us today to schedule a consultation and start securing your financial future.
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Options for an Inherited IRA
Reference: Charles Schwab (May 1, 2024) “Inheriting an IRA? Understand Your Choices”
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