Thursday, August 11, 2011

What to do if you inherit an IRA

Beneficiaries often aren’t sure how to handle an IRA their loved one left them. Some think they can just let the account stay as is. And I’ve seen others who think they can take the all the money and ignore the tax consequences. What’s more, there are a lot of misconceptions floating around … even among financial advisors.

Here’s one:

Beneficiaries might be led to believe they have to empty the inherited account within 5 years after the date of death (the 5-year rule). Yet they probably have a whole lot longer to deplete the account, which means more tax-deferred growth.

This “stretching” of the withdrawals over many years can also reduce the overall income tax bite.

There are cases when a beneficiary will have to remove the inherited money within 5 years. But these are the vast minority.

So how would you know if this applies to you?

One point to check out is if you were directly named on the IRA beneficiary form. If so, the 5-year rule most likely won’t apply. That means you can stretch the withdrawals over your life expectancy.

There are a whole slew of rules when it comes to inherited IRAs, including: Your relationship to the deceased, their age, and whether they started taking required minimum distributions yet. So you’d be wise to read through them or get with an advisor who can help you out.

IRS Publication 590, page 18, is a good place to start.

Good luck!


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