{"id":1126,"date":"2011-03-28T13:16:10","date_gmt":"2011-03-28T18:16:10","guid":{"rendered":"http:\/\/www.billlosey.com\/?p=1126"},"modified":"2011-03-28T13:16:10","modified_gmt":"2011-03-28T18:16:10","slug":"an-inherited-ira","status":"publish","type":"post","link":"https:\/\/billlosey.com\/knowledge-center\/an-inherited-ira\/","title":{"rendered":"An Inherited IRA"},"content":{"rendered":"<p>When  the owner of an IRA passes away, his or her heirs must be aware of the  rules and regulations affecting the inherited IRA. Ignorance could lead  you straight toward a tax disaster.<\/p>\n<p><span style=\"text-decoration: underline;\">Please note that this is simply an overview<\/span>.  Rather than use this article as a guide, use it as a prelude before you  talk to a financial services professional well-versed in IRA rules and  regulations.<\/p>\n<p><strong>First, make sure you have actually inherited the IRA.<\/strong> Your spouse, parent or grandparent may have left their traditional or  Roth IRA to you in a will, but that doesn\u2019t mean you have inherited it.  In all but rare cases, an IRA beneficiary designation form takes  precedence over any bequest made in a will or living trust. (The same  thing applies with annuities and life insurance policies.)<\/p>\n<p>So your first financial task is to find that beneficiary form.<\/p>\n<ul>\n<li><em>What if I can\u2019t find the form?<\/em> The financial firm serving as the custodian of the IRA assets will  usually have a copy. (If the IRA was opened decades ago, it may not.)<\/li>\n<\/ul>\n<ul>\n<li><em>What if there is no beneficiary designated on the form? <\/em>Then  the financial firm supervising the IRA will choose a beneficiary  according to its rules and\/or IRS guidelines. It may decide that the  decedent\u2019s estate will be the beneficiary of the IRA, which is often the  poorest outcome in terms of taxation.<\/li>\n<\/ul>\n<ul>\n<li><em>What if I\u2019m not the beneficiary named on the form? <\/em>The  IRA assets are destined to go to whoever the named beneficiary is. If  the named beneficiary is deceased, the IRA assets will be inherited by  the contingent beneficiary (if one has been named).<\/li>\n<\/ul>\n<p>Ideally, the original IRA owner has told you where (or left instructions where) to find the form.<\/p>\n<p><strong>Understand the rules for spousal and non-spousal heirs.<\/strong> If your husband or wife has passed and you are the named beneficiary of  his or her Roth or traditional IRA, you have three options.<\/p>\n<ul>\n<li><em>You can roll over the assets into a beneficiary IRA.<\/em> This enables you to withdraw money from the IRA based upon your own  life expectancy \u2013 and you can wait until the year in which the original  IRA owner would have turned 70\u00bd to start taking required withdrawals  from the IRA.<\/li>\n<li><em>You can convert the inherited IRA into your own IRA.<\/em> If you don\u2019t have an IRA, you can create one for this purpose. This  gives you the ability to name your own beneficiary, and it also allows  you to keep contributing to the account and put off required minimum  distributions (RMDs) until you turn 70\u00bd.<\/li>\n<li><em>You can \u201cdisclaim\u201d all or some of the inherited IRA assets.<\/em> If you don\u2019t want or need the money from the inherited IRA, here is  another option. By doing this, the income distribution off the IRA can  go to the contingent (or successor) beneficiary. Spousal IRA heirs  sometimes do this with the goal of reducing income and estate taxes.<\/li>\n<li><em>If  the inherited IRA is a Roth IRA, the surviving spouse may not have to  wait so long to get tax-free income distributions off the earnings. <\/em>While  the original contributions to a Roth IRA can always be withdrawn  tax-free and penalty-free, a Roth IRA owner must wait 5 years to avoid  income tax on any earnings withdrawn from the account. However, a  surviving spouse who inherits a Roth IRA can receive \u201ccredit\u201d toward  this 5-year waiting period for the years that the deceased spouse owned  the IRA. The waiting period ends either a) 5 years after the deceased  spouse opened the account or b) 5 years after the surviving spouse has  opened his or her own Roth IRA.<\/li>\n<\/ul>\n<p>Non-spousal  heirs often get little or no guidance when it comes to inherited IRAs.  Too often, the financial firm overseeing the IRA just asks, \u201cWhat do you  want to do?\u201d Often the IRA heir doesn\u2019t know what to do.<\/p>\n<ul>\n<li><em>Ask the financial firm to help you retitle the inherited IRA.<\/em> This will enable you to arrange a direct rollover of the inherited IRA  assets from the original IRA owner\u2019s financial custodian to the  financial firm that serves as the custodian of your investments. This  has to be done by September 30 of the year following the year in which  the original IRA owner passed away. This is also a necessary move to  \u201cstretch\u201d the IRA assets. Usually the new title for the IRA is something  like \u201cMary Jones IRA\/Deceased 4\/8\/2010\/ FBO (for the benefit of) Thomas  Jones as beneficiary.\u201d This retitling signifies to the IRS that this is  an inherited IRA.<\/li>\n<li><em>You should be made aware of the consequences if you don\u2019t retitle the inherited IRA.<\/em> Let\u2019s say you don\u2019t retitle the inherited IRA as above. Instead, you  just withdraw the assets from the inherited IRA and deposit them an IRA  you have held for some years now. If you do this, the entire inherited  IRA balance will be treated as taxable income and your federal tax bill  could be huge.<\/li>\n<li><em>You should be made aware that you can name a beneficiary. <\/em>All IRA owners and IRA heirs have a right to do this. No named beneficiary, no stretch IRA.<\/li>\n<li><em>If you weren\u2019t married to the original IRA owner, you should be told some inherited IRA basics.<\/em> Non-spousal heirs of IRAs can\u2019t contribute to an inherited IRA and  can\u2019t put off required minimum withdrawals from an inherited IRA.<\/li>\n<li><em>You don\u2019t necessarily have to take a lump sum when it comes to withdrawing the IRA assets. <\/em>This  is one way inherited IRAs are quickly depleted. A beneficiary can  arrange to make smaller required minimum distributions (RMDs) from the  inherited IRA according to his or her life expectancy. These withdrawals  must start by the end of the year following the year in which the  original IRA owner passed away. If you don\u2019t start taking these required  withdrawals by December 31 of the following year, you will pay a  penalty. Taking smaller withdrawals allows some of the IRA assets to  stay invested with tax deferral, and it spreads the income tax liability  on the inherited IRA money over a multi-year period.<\/li>\n<li><em>You may be eligible for a big tax deduction related to income distribution off the IRA.<\/em> Income from an inherited IRA is what the IRS terms \u201cincome in respect  of a decedent\u201d. This means you can take an income tax deduction for the  portion of the estate tax attributable to the inherited IRA (this is  detailed in IRS Publication 590).<\/li>\n<li><em>If multiple beneficiaries are inheriting the IRA, you should be informed that you might be able to split the IRA up. <\/em>When  multiple beneficiaries inherited an IRA years ago, they had to share it  and make joint investment and withdrawal decisions. Now it is possible  to divide an inherited Roth or traditional IRA into multiple IRAs, one  for each beneficiary. (Ask the IRA custodian if it will allow this.)<\/li>\n<\/ul>\n<p><strong> <\/strong><\/p>\n<p><strong>So if you inherit an IRA, read up on the rules.<\/strong> Knowledge is truly an asset when you inherit sizable funds from any  kind of retirement account. The more informed you are and the more  guidance you have, the better the potential outcome.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>When the owner of an IRA passes away, his or her heirs must be aware of the rules and regulations affecting the inherited IRA. Ignorance could lead you straight toward a tax disaster. Please note that this is simply an [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":["post-1126","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1126","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/comments?post=1126"}],"version-history":[{"count":0,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/1126\/revisions"}],"wp:attachment":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/media?parent=1126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/categories?post=1126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/tags?post=1126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}