We regularly get inquiries from our clients who are recipients of an inheritance. An ever increasing asset that is being inherited is a retirement account such as an IRA. Special considerations must be attended to when inheriting an IRA because of their special characteristics.
In this blog, we’ll discuss some of these considerations.
Don’t automatically request to cash in the IRA. The income tax repercussions could be great and there are better options. If you opt for a lump sum distribution, you could lose out on the smarter opportunity of seeing it continue to grow on a tax deferred basis and, instead, you’ll definitely feel the pain of immediate taxation.
Under IRA rules, you aren’t afforded the option of adding this to your own IRA unless you are a spouse who is eligible for a “rollover”. What you can do, however, is incorporate a direct “trustee to trustee” transfer and elect a “stretch” option. You are then able to withdraw an amount every year over the course of your life. If, however, you want the money faster, say, over a ten year period, you can request a specific payout for each of those ten years. In either scenario, you will see the account continue to appreciate and you’ll also appreciate the income tax deferment too.
The rules for inherited IRAs are very complicated. Depending on the circumstances, different rules may apply. If the rules are not properly followed, the IRA beneficiary may end up paying higher taxes and/or penalties, not to mention the risk of losing the opportunity for the tax advantages that do exist. It’s important to speak with an experienced and qualified estate planning attorney so that you can make the most of your inheritance and in a way that would make any mother proud.
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- Getting Started in Estate Planning – The First Meeting with Your Attorney - December 3, 2022
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