The SECURE Act changed the rules for distributing assets from an inherited IRA upon the death of an IRA owner. Here’s what you need to know…
IRAs come with their own set of rules such as-minimum age for withdrawals, required minimum distributions after a certain age, taxes, and penalties to enforce them. If you’ve recently inherited an IRA, you may be wondering what to do next. Unfortunately, inherited IRA’s can be a complex issue to handle, especially if you’re in the midst of trying to close out an estate.
What is an Inherited IRA?
An inherited IRA, also known as a beneficiary IRA, is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies.
A beneficiary may open an inherited IRA using the proceeds from any type of IRA. Generally, assets held in the deceased individual’s IRA must be transferred into a new inherited IRA in the beneficiary’s name. This transfer must be made even if a lump-sum distribution is planned. Additional contributions may not be made to an inherited IRA.
If you are the son, daughter, brother, sister, or even a close friend of an IRA owner who has named you as their beneficiary, it’s critical that you — and the owner of the IRA — understand the rules that govern IRA inheritances. Here’s how you can avoid making some costly mistakes around an inherited IRA.
How an Inherited IRA Works
Any type of IRA may be turned into an inherited IRA. When you inherit an IRA, there are several decisions depending on the situation. If you inherited an IRA, and you’re the spouse of the original owner, you have one set of choices. If you’re a minor child, chronically ill or disabled, or not more than 10 years younger than the original owner, you have another set of choices. Whether the original account owner had to take required minimum distributions (RMDs) can also influence what you can and should do with the IRA.
What if I Get an IRA Not From My Spouse?
If you get an IRA from anyone other than a spouse, you cannot roll it over or put it in your own name but will have a few options. You may take a lump sum although it will be taxed as ordinary income rate, at your marginal tax bracket. An IRA of $100,000 can be taxed up to 28%.
If you don’t want the lump sum, you can have it paid out to you, but this must be done within five years. And again, every withdrawal will be taxed. Your final option is to make it an inherited IRA, like spouses can. You will have to follow a life expectancy table which tells you your RMD for each year, which will be taxed. However, because the IRA is preserved over time, it can continue to grow, giving you a longer stream of income.
Can I avoid being taxed?
Unfortunately, you can’t avoid being taxed. You can only choose the time at which you withdraw from it, but any withdrawal will be taxed. It’s important to note that there are penalties for not withdrawing on time. Not all options are equally as good for everyone, and you will want to consider the tax loads and penalties associated with all outcomes.
If you are a beneficiary and inherit an IRA, it’s important that you get a complete understanding of your options, and the potential outcomes of each available option for you and the inherited IRA. This content was originally published here.