When you inherit an IRA or make plans to pass along yours to your heirs—also known as a beneficiary IRA—you’ll likely have several decisions to make. You’ll want to limit the tax consequence while also putting in place a plan to manage the newly transferred money properly.Here are some things to keep in mind regarding beneficiary or inherited IRAs.
First, you are able to withdraw money from your IRA without penalty as long as you return it the account in full within 60 days. When that IRA is inherited, though, that luxury does not apply. The funds you inherit must be moved from one IRA custodian to another, or a trustee-to-trustee transfer. You must also retitle the name of the IRA.
IRAs can also be split between multiple beneficiaries. Spouses have the option to roll the assets into their own IRA and wait to distribute the money from a traditional IRA until he or she reaches the age of 70 ½. Heirs who are not spouses must begin taking minimum distributions the year the account holder died—regardless of whether the account is a Roth or Traditional; that is post- or pre-tax.
You can lower your distribution requirements by dividing the total amount in the IRA passed down by your life-expectancy, instead of using the typical IRA distribution guidelines. This will elongate the tax benefits of the account. Some 401(k) accounts are different, particularly if they are employer plans. Employers may not let beneficiaries stretch out the benefits of a plan.
At the end of your life you can plan to stretch out the benefits of your holdings by naming younger beneficiaries, like your kids, as primary beneficiaries and your grandkids as alternates. Lastly, by leaving the money to an estate, you force the heirs of the estate to distribute that money within 5 years.
If you have any questions, feel free to contact us at New Direction IRA or visit www.ndira.com.
