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If You’ve Inherited an IRA, Here’s What You Need to Know

June 07, 2016

Don’t let your inherited IRA become consumed by taxes—There are options for both spouse and non-spouse beneficiaries.

Have you recently inherited a loved one’s individual retirement account? Not sure what type of IRA you have inherited or what type of beneficiary you are? We are here to help. There are a number of options you can avail yourself of in this situation; read on to find out more.

4 options for surviving spouses

If you are a surviving spouse, there are at least 4 options for you when dealing with an inherited IRA. All 4 have their upsides and downsides, though.

1. Move the inherited IRA assets into your existing IRA.

  • Pros- With this option, you can postpone RMDs (Required minimum distributions) until age 70 ½. In addition to this, it is easy to do and you are able to use your own life expectancy to calculate the RMD amount.
  • Cons- You are able to combine your own IRA with an inherited IRA, but the drawback here is that you will be tacked with a 10% penalty tax on any distributions taken before you reach age 59 ½.

2. Convert your deceased spouse’s IRA to your own Roth IRA.

  • Pros- If you expect to be in a higher tax bracket in the future, this might be a beneficial option for you. With a Roth IRA you don’t have to worry about RMDs and withdrawals from a Roth are not subject to income tax.
  • Cons- If you do not work with an experienced estate planning attorney, you could run into costly surprises in the future. Keep in mind that if you withdraw money from a Roth that has been open for less than five years, you will have to pay an early withdrawal penalty.

3. Relocate assets into an inherited IRA that is properly-titled.

  • Pros- As a surviving spouse, you will not have to pay the 10% penalty when withdrawing from an inherited IRA before you turn 59 ½. If your deceased spouse was younger, you might be able to delay RMDs, too.
  • Cons- This option is tricky since you will have to keep your own retirement accounts separate from the inherited account.

4. Renounce all or part of the assets in the IRA.

  • Pros- If you are not in dire need of the money, or if the estate was not properly set up, this option is the right choice. Disclaiming the assets to the contingent, or alternate beneficiary your spouse named in his/her will, will allow you to have assets possibly pass to younger beneficiaries (a young beneficiary can take out smaller RMDs than an older beneficiary) and it will also allow you to keep assets out of your deceased spouse’s estate.
  • Cons- This option is irreversible, and you relinquish control over where the money goes.

What if I’m a non-spouse beneficiary?

For non-spouse beneficiaries, the rules are a bit different:

  • Non-spouse beneficiaries cannot roll over the inherited assets into an IRA under their name.
  • A non-spouse beneficiary can either transfer assets into an inherited IRA or disclaim part or all of the assets.
  • In order to prolong receipt of the plan assets over their life expectancies, non-spouse beneficiaries must transfer assets to the inherited IRA by December 31st of the year following death.

An inherited IRA can easily be consumed by taxes if proper planning and guidance are not sought by a surviving spouse or non-spouse beneficiary. Consult your estate planning advisor for further guidance.

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