When inheriting an IRA from someone, it’s essential that you understand how best to handle it so as to minimize taxes. If you are married and inherit assets together with their IRAs, roll these over into your own IRA instead.
Stretched distributions may help lower your tax bill; this depends on a number of factors such as whether or not the original account holder took required minimum distributions (RMDs).
IRA to IRA rollover
After receiving an IRA as an inheritance from a loved one, you may find it challenging to decide how best to manage it. Unfortunately, decisions regarding how best to administer it can be daunting since the SECURE Act, passed in 2019, made several modifications to how inherited IRAs should be managed.
One option would be to roll the assets over into an IRA in your name – provided it’s not non-spousal – which will treat it just like your personal account and adhere to similar withdrawal regulations.
But this strategy only works if the original account owner was not your spouse and you’re at least five years older than they were. Otherwise, you may be required to liquidate it within 10 years and could incur penalties. It is wise to consult a financial professional regarding which distribution options best suit your situation as different distribution choices could impact tax liabilities differently.
IRA to Roth IRA rollover
An inherited IRA can be an invaluable resource for its beneficiary, but tax considerations must be considered when making decisions about its use. Non-spouse heirs must use up their account within 10 years and may need to take required minimum distributions as early as year one; any withdrawals could cause their taxes to jump higher, making converting to a Roth IRA the more advantageous choice.
To avoid incurring the 10% early withdrawal penalty, beneficiaries can transfer inherited assets into an existing IRA in their name and take part in its distribution rules as though they had always owned it themselves.
Beneficiaries who need to level their income over the course of multiple tax years could consider using this strategy to secure tax-free withdrawal of inherited assets when withdrawing them for retirement purposes. Converting them into Roth IRAs could also prove useful as tax-free withdrawal is considered tax-free when made when withdrawing money later on in retirement.
IRA to SEP IRA rollover
The IRA to SEP IRA rollover allows you to transfer an inherited IRA into your new tax-deferred retirement account tax-deferred, saving both time and taxes in the long run. Although this process is complex and may help save on taxes over time. But professional advice should always be sought before initiating it yourself.
Asserting an inheritance of an IRA comes with some complex IRS regulations. Notably, non-spouse beneficiaries must abide by a 10-year withdrawal rule established by the SECURE Act; furthermore, you cannot manipulate distributions to reduce taxes or penalties.
If you choose a direct rollover, your financial institution will send a check payable to your new SEP IRA, which must be deposited within 60 days in order to avoid taxes and penalties. Otherwise, any distribution must be taken as income with an accompanying 10% penalty fee assessed against it. Using this method also limits how easily funds may be moved between different IRAs.
IRA to SIMPLE IRA rollover
When inheriting an IRA, it’s crucial to understand your options for managing it. As the rules surrounding inherited IRAs can be complex and intricate, it is wise to work with an expert who can explain which options best suit your particular circumstances. One option could be rolling funds over into an existing IRA account to avoid taxes and penalties altogether; alternatively, lump-sum distributions could allow you to spread out tax liabilities over several years and reduce how much must be withdrawn at age 59 1/2.
Rollover of IRA assets into traditional or Roth IRAs may also be possible; however, you must do this within two years after initially contributing. Otherwise, any transfer would be treated as a distribution and would trigger steep tax penalties.