As the beneficiary of a traditional IRA, you have several options open to you if it needs moving. One way is through what’s known as trustee-to-trustee transfer; another would be using trustee-to-trustee transfer services.
Roll over into an individual retirement account (IRA), which works best if you are aged over 59 1/2, in order to avoid paying an early withdrawal penalty of 10%. Or you can opt for stretch distributions over your lifetime expectancy period.
How to Convert an Inherited IRA
Recipients of an inherited IRA often violate IRS rules when they fail to take required minimum distributions (RMDs) within 10 years after their deceased account holder’s death. These requirements specifically relate to inheriting an IRA and differ from those which apply to traditional and Roth IRAs.
Beneficiaries have two options when withdrawing funds: they can “stretch out” distributions over their lifetime or take all at once in one lump sum payment – though often this option will place them into higher tax brackets.
As Inherited IRAs can be complex, it is advisable to seek professional advice. But be wary when working with advisors with less experience in this area as mistakes or bad advice could have serious repercussions. When considering conversion, it would be prudent to work with someone familiar with Inherited IRAs who can help ensure you avoid common pitfalls while maximizing benefits.
Taxes
Government tax breaks provide retirement savings with tax advantages; however, any withdrawals made from an inherited IRA are subject to income taxes as any other withdrawal would be.
IRA inheritance rules can be complex, depending on your relationship to and date of death of the original account owner. Spouse beneficiaries, for instance, have nearly unlimited options with regard to how their IRA should be handled; otherwise non-spouse beneficiaries have fewer choices.
An inherited IRA (also referred to as beneficiary IRA) is a new retirement account opened by the beneficiary following the original account owner’s death, with tax-deferred growth continuing and withdrawals not incurring the 10% penalty. You must empty your inherited IRA within 10 years or pay income taxes on distributions, although withdrawals can be spread out over multiple years in order to minimize tax impact – this option could be particularly attractive for beneficiaries expecting to fall within higher tax brackets when withdrawing their money from this type of account.
Rollover Options
Inherited IRA assets may be distributed in several ways. A beneficiary has several options for how they would like the account distributed: they could keep it as part of an “inherited IRA”, treating it like it’s their own account, or roll them over into any IRA of their choice – traditional or Roth, with pretax or post-tax assets within.
Rollovers can be accomplished either directly between trustees, or by taking distributions from their original account and depositing them within 60 days into an IRA account – this action is nonreportable to the IRS and counts as nonreportable transaction.
For spouses, this option often offers the most benefit; they can access an inherited IRA just like it were their own without incurring an early withdrawal penalty unless they’re under age 59 1/2. Non-spouse beneficiaries will typically need to empty it within 10 years or pay income tax on the full amount (unless one of the exceptions apply).
Beneficiary Options
Inherited IRAs come with their own set of rules and responsibilities that differ from regular IRA accounts, so it’s wise to consult a financial professional when making decisions regarding how best to approach these assets.
If you are the spouse or other qualifying family members of an account owner who has passed on, and meet certain conditions, they can opt to treat their IRA like their own and take RMDs based on either life expectancy or withdrawing within 10 years, whichever comes first. Non-spouse beneficiaries can elect not to take distributions if they do not need or are younger than 10 years than original account owner.
Non-spouse beneficiaries have other options available to them when inheriting an IRA; such as splitting it into separate accounts or even converting it to an annuity with withdrawals spread out over their lifetime and thus avoiding an early withdrawal penalty of 10%. Each option comes with its own set of requirements and tax implications that may differ based on individual circumstances.
