You Inherited a Retirement Account – Now What?

by | Mar 14, 2019

By: Barry E. Haimo, Esq.
March 14, 2019

Last Will and Testament document

You Inherited a Retirement Account – Now What?

Inheriting a retirement account tells you that your loved one cared about your financial well-being. Which is fantastic. Inherited retirement accounts can provide you with a lifetime of payouts.

Unfortunately, the tax laws that govern inherited retirement accounts are somewhat complicated, and even the simplest of mistakes can be costly. This is why one needs to be sure that they are making the right decisions about their inheritance.

Important Things to Know Before Making a Decision

How you handle an inherited IRA (Individual Retirement Account) will hinge upon various factors, including:

The capacity in which you’ve inherited the IRA

The beneficiary of an IRA can be:

  • An individual (i.e. a spouse, relative, or friend)
  • A trust that you manage as the trustee
  • An estate that you manage as the executor

The type of IRA that you’ve inherited

You could inherit:

  • A traditional IRA (e.g. a regular IRA, a SIMPLE IRA, or an employer-sponsored SEP-IRA)
  • A Qualified Retirement Plan (e.g., a 401(k), a profit-sharing money-purchase, or a 403(b) plan that’s employer-sponsored)
  • A ROTH IRA (some ROTH IRAs have special tax benefits)

The age of the individual from whom the IRA was inherited

The start of the RMDs (Required Minimum Distributions) for an inherited retirement account are determined by the age of the original account holder. Knowing the specific age of the person from whom you inherit an IRA is important because:

  • The date when you begin taking RMDs depends on whether that person had attained the age of 70.5 years or whether their RBD (Required Beginning Date) had been reached.
  • Not taking RMDs when you are required to may cost you a 50% IRS penalty on that RMD amount.
  • The annual RMD amount that you take depends on your life expectancy as well as the year-end value of the IRA account.

It’s important that you get all the relevant information about all of the above factors, because the IRS rules affecting your inheritance will vary based on these factors.

What Are Your Options?

Spouses can transfer the money into their retirement accounts. The distribution rules will be the same as if the inherited account had originally been yours.

Open an inherited IRA and transfer the assets into that account. The money can continue growing – tax-deferred – until you are required to start withdrawing the RMDs.

Take all the money from the inherited account right away. Essentially, your inheritance is yours, and thus you are at liberty to take money from that account in one lump sum. However, you should expect several tax implications depending on the type of the IRA and contributions (whether pre- or post-tax).

It’s also important to remember that you might be pushed into a higher tax bracket if you withdraw a taxable distribution in a single lump sum.

Choose to “disclaim” the IRA. It’s not unusual for people to disclaim an inheritance, thereby allowing it to be passed to other beneficiaries. You may, for instance, disclaim an IRA if the tax implications it brings are not ideal for you. This is why it’s highly recommended that you speak to a knowledgeable estate planning attorney to determine which is the best way to handle an inherited retirement account.

Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com 
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