When inheriting an IRA, there are multiple strategies available. Be sure to work with an expert advisor in deciding what approach would make the most sense for you and your needs.
Rules regarding beneficiary accounts differ depending on your relationship to and age of the deceased, with nonspouse beneficiaries having several options including rolling them into their own retirement accounts, taking distributions over time or incurring an early withdrawal penalty fee if withdrawing them early.
Disclaim the Inheritance
As inheriting an IRA can be complex, with each option coming with its own set of rules and tax implications, managing its funds may prove to be challenging.
Disclaiming an inheritance can be beneficial when looking to pass funds to another beneficiary or don’t require their funds yourself. This way, disclaiming can formally waive your claim to them indefinitely and can provide more options available to you when looking at how you want to distribute or spend them.
Rolling over an inherited IRA into your own IRA allows you to treat its contents as though you had always owned them and take necessary distributions according to IRS rules (assuming you are age 59 1/2). However, this may result in a 10% income tax penalty on withdrawals made prior to this point.
Deplete your IRA over your expected lifespan using IRS Publication 590’s life expectancy tables; however, this method cannot be applied to nonspouse beneficiaries.
Roll the Contents into an Existing IRA
An inheritance of retirement accounts can be both devastating and rewarding – it offers you the chance to build long-term wealth through various options for managing them that each come with their own rules and tax implications.
One possibility for handling an inherited IRA is through “inherited IRA assumption”. You can do this by opening an inherited IRA at either of the original account owner’s institutions, or opening one elsewhere – an approach suitable for spouse beneficiaries who need help managing tax rules effectively and managing required minimum distributions (RMDs) over their life expectancies. Please consult a professional financial adviser if this approach seems daunting to manage on your own.
Take a Lump-Sum Distribution
Ideally, if you wish to keep the funds from an inherited account and use them later on in life, the best course is consulting a financial advisor for planning purposes. Funds typically must be dispersed within 10 years after their original owner died and taxed as ordinary income; however, distributions can be staggered if you are no more than 10 years younger than the original account owner and adhere to certain guidelines.
To do this, you’ll need to transfer the assets into an IRA under your name; this is the only way to avoid paying a 10% early withdrawal penalty and benefit from tax deferral on growth. Lump sum distributions also incur this penalty and may end up increasing your tax bracket; or another option could be disclaiming an inheritance which must be done within nine months after its original account owner dies (this process can be complex).
Take a Lifetime Withdrawal
With this option, the contents of your IRA will be received as cash without incurring an early-withdrawal penalty; instead, these funds will be considered income. Invest this money according to your goals and time horizon as desired.
As this approach may have significant tax repercussions, you should consult a seasoned tax advisor before making a decision. Furthermore, this strategy may become especially complex if your spouse already has an IRA account in their name.
This approach attempts to minimize taxes by spreading withdrawals over several years. This method can be especially helpful for beneficiaries with fluctuating income – if yours fluctuates considerably from year to year, weighting withdrawals toward years when income is lowest, this strategy can minimize its effect on your tax bracket.