Inherited IRA Rules You Should Be Aware Of
If you have inherited an individual retirement account (IRA), it can be very confusing in terms of how your new account or asset is affected by estate, financial and tax planning. Your choices very much depend upon if you are a spouse or non-spouse, who left you the IRA, and whether the original account owner had to take the required minimum distributions, and making one wrong decision can lead to very expensive consequences.
What you end up doing also depends upon whether you want to minimize your tax payments or maximize cash distributions. However, one thing you most definitely do not want to do is cash out the plan first before consulting an estate planning attorney or financial advisor. Instead, if you have inherited an IRA, speak to an expert before you take action.
Below, we discuss some basic information that may be informative when it comes to handling inherited IRAs:
If You Inherit From A Deceased Spouse
Spouses have the most options. If you inherit an IRA from your deceased spouse, you have the following choices:
- Name yourself as the owner;
- Roll it over into another account; either an IRA or a qualified employer plan (such as a 403(b)); or
- Make yourself the beneficiary of the plan.
Note that if you are the sole beneficiary and name yourself as the owner, or roll it over into another account, you may have to take the required minimum distributions. However, this depends upon your age. In addition, you may also have the option of not withdrawing the funds at all. Those funds could then continue to grow in your IRA until you are 70 ½ years old.
If you roll the IRA into an account for yourself, know that this resets everything, and you’re able to name your own beneficiary, therefore making the IRA your own. Note, however, that the rules differ when it comes to what you can do with a Roth versus traditional IRA.
If You Are A Non-Spouse Beneficiary
Non-spouse beneficiaries have different rules than spouses. They have two options if they wish to liquidate the account:
- They can take distributions over the course of a lifetime, known as the “stretch” option, which leaves the funds in the IRA for as long as possible and shelters them from taxation while they grow. In this regard, it is important to keep your ion with the Congress decides to eliminate the stretch IRA. The provision proposed in 2019 will require non-spouse heirs to withdraw the full amount of an inherited IRA within 10 years; or
- The account must be liquidated within five years of the original owner’s death. This can result in a significant income tax bill unless the IRA is a Roth, in which case, taxes have already been paid.
Act Quickly, But with Guidance
Note that if you are a non-spouse beneficiary, it is very important to act quickly. In order to go with the stretch option, you have to take your required minimum distributions based on your own life expectancy, and there is a cutoff date for taking your first withdrawal; depending upon the age of the original account owner.
Find Out About Benefactor’s Distribution
You also need to figure out if your benefactor took out their distribution before passing and giving you their IRA. If they did not, you have to take it out, and if you forget to do this, you could end up paying a 50 percent penalty. This is especially tricky if the benefactor dies late in the year and you do not find out that it is now your account in time to take the year’s distribution.
Also note that when it comes to estates that are subject to the estate tax, anyone who inherits an IRA will get an income tax deduction for the estate taxes.
If You Are A Benefactor, Make Sure Your Beneficiary Form Is Complete
Perhaps most importantly, if you are the benefactor, you may have assumed that you completed your beneficiary form when in fact it was left ambiguous or incomplete, which can completely sink your state plan. For example, perhaps you placed your beneficiary’s name on the form, but not their Social Security number, which could make it difficult to track down the beneficiary if they move frequently or have a similar name to others in your family, for example. If the form is not complete or is not on record with the custodian, this creates many problems. The account would then go to the estate and your beneficiary would be stuck with the five-year-rule in terms of distributions.
Contact The Right Estate Planning Attorney
Also know that consulting the right estate planning attorney is imperative. For example, if a trust is listed as a primary beneficiary of an IRA, and this is done incorrectly, it can significantly limit your beneficiaries. For example, if the provisions of the trust have not been drafted carefully and the custodians cannot determine who the qualified beneficiaries are, those same accelerated distribution rules apply. You need to ensure that your trust is drafted by an attorney that has experience with rules leaving IRAs to trusts. This individual will also be able to assist you in selecting a good financial advisor, if that is necessary as well.
For any information on inherited IRAs and estate planning here in Florida, contact our experienced Orlando estate planning attorneys at Gierach and Gierach, P.A. today to schedule a consultation.