Contributed by: Laurie Renchik, CFP®, MBA
During a recent meeting with a client (let’s call her Anne), we discussed the options available to her as the beneficiary of her brother Jim’s IRA. This is an important discussion because there are certain tax benefits that come with inheriting an IRA, but the rules differ depending on whether you are a surviving spouse or what is called a non-spouse beneficiary. In this case Anne is considered a non-spouse beneficiary because she is the sister of the original account owner, Jim.
Here are the options available to Anne:
- She can rollover the assets directly into an Inherited IRA for her benefit. With this option Anne will take distributions over her lifetime and enjoy the benefits of tax deferred growth.
- Anne can take a lump-sum distribution. With this option, there is an immediate tax impact. The value of the distribution is taxed as ordinary income in the year it is withdrawn. Because the IRA is inherited Anne can take the lump sum prior to age 59 ½ and not be subject to the 10% penalty that is usually applied for distributions before age 59 ½.
- The third option is that Anne does not have to take the inheritance. She can disclaim all or part of the inherited assets. If this option is chosen the assets pass to the next eligible beneficiaries. If Anne considers this option she wants to be sure all of the legal requirements are met.
When handled correctly, Anne as a non-spouse beneficiary can enjoy the continued potential for tax-advantaged growth of these assets while avoiding the immediate income taxes.
Our discussion also highlighted some common mistakes to avoid:
- A non-spouse beneficiary cannot move the inherited IRA into his or her own IRA. An inherited IRA must be kept totally separate from other IRA’s Anne may have and no new contributions can be deposited into the account.
- Beneficiaries named on an IRA account supersede instructions provided in a will or trust. Since the IRA account information takes precedence it is important to make sure the designated beneficiaries named on the inherited IRA are up to date.
- No 60-day rollover. With this rule, you can take a distribution from your own IRA as long as you put the money back in the same account within 60 days, you won’t have to pay income taxes or a penalty. Unfortunately, you can’t do this with inherited IRAs. There is no 60 day rollover rule for inherited IRAs. If you withdraw the money, it’s taxed.
- If you inherit an IRA, whether it’s traditional or Roth, the IRS requires you take at least some of the account balance each year. It’s called a required minimum distribution and must be taken annually, regardless of your age, beginning the year following the year-of-death of the original account owner. If you don’t take the distribution, the penalty ends up being 50% of the amount you were required to take.
If you are faced with decisions regarding an inherited IRA and have questions feel free to give me a call or send me an email. I’ll be happy to review your options with you and make sure the choice works in harmony with the rest of your financial plan goals and objectives.
Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.