Introduction to Inherited Retirement Accounts and Estate Planning

inherited retirement accounts and estate planningIndividual retirement accounts (IRAs) are often one of the most substantial assets we have in our name. We save money and place it into these accounts over the course of our working years so that we have assets to draw upon when we decide to retire. Sometimes, these accounts are not fully exhausted by the time we die. When this happens, the IRA’s funds are then made available to the beneficiary of the account. Using these inherited funds, however, is not necessarily a straightforward and simple task for the beneficiary.

When You Inherit Your Spouse’s IRA

When you inherit your spouse’s IRA, the Internal Revenue Service will treat the IRA as if it were your own for tax purposes. This enables you to roll the IRA over into a new account or put the IRA into your name. In this case, you could wait until you reach the age of 70 ½ years before commencing to withdraw from the account (unless the IRA is a Roth IRA, in which case you do not need to take distributions from the account). Also, you could keep the IRA in your spouse’s name and begin withdrawing from the account when your spouse would have passed his or her 70 ½ birthdate. If your spouse died at this age, withdrawals can begin one year after the date of your spouse’s death. Finally and alternatively, keeping the IRA in your spouse’s name would also enable you to drain completely the account and pay all applicable taxes if you do so within five years of your spouse’s death.  For more information see the article on 8 Ways to Go Wrong with an Inherited IRA.

When You Inherit an IRA from Someone Other Than Your Spouse

bag of money representing inherited retirement accounts and estate planningIf you are the named beneficiary to the IRA of someone other than your spouse (a parent or grandparent, for instance), you have two options for handling the account. First, you can withdraw all of the funds in the account over the course of five years and pay all applicable taxes on those distributions. The amount of distributions you receive each year would be up to your discretion. You could, for example, withdraw all funds from the account in a single year. This would also require you to pay all applicable taxes on those distributions in that same tax year. Alternatively, you could divide up the funds of the account and take five equally-sized distributions every year. While you would end up paying taxes on each of these distributions, the yearly tax obligation would likely be lower.

The other alternative for handling an inherited IRA is sometimes referred to as the “stretch” option. Under this option, you retitle the IRA as an inherited IRA and take your first distribution from the IRA by the end of the year in which the decedent died. You must then take minimum distributions from the account over the course of your lifetime. Any funds left in the IRA at the time of your death can be left to your heirs and beneficiaries. The minimum amount that you must take from the inherited IRA will be determined based on your life expectancy.

Conclusion to Inherited Retirement Accounts and Estate Planning

When you are the beneficiary of an IRA, you have several options for handling the funds of the account depending on the relation of the decedent to yourself. Each option has its advantages and disadvantages, and some courses of action can result in you being responsible for a substantial tax obligation. Beneficiaries who are uncertain of their options may find it necessary to seek advice and assistance from a qualified professional who is familiar with the regulations surrounding inherited IRAs to make the best decision for themselves and their families.  Contact James Standring for more information regarding your inherited retirement accounts and estate planning.