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IRA Beneficiary Rules & Options

If you’ve recently inherited an IRA, you may find the beneficiary rules are pretty complex. They differ depending upon your relationship with the former owner of the IRA. They are determined by what you decide to do with your new account. The option you choose may have a deadline and carry a tax burden—and that date and those taxes may be different than the ones inherent with other options. This explains why I recommend consulting a professional if you’ve inherited an IRA.

I also believe it’s important to know the basics, though, and am happy to offer a primer.

Basically, you have four options to consider:

  1. Take all the money now. Of course, you can cash in the IRA and buy a Corvette or a house or whatever else you heart desires. Nice as it sounds, I don’t typically recommend this option. Depending on the size of the IRA or retirement plan you inherited, the taxes could be significant, and at RPOA we generally believe that most people should pay taxes as far into the future as possible.
  2. Treat the Inherited IRA as your own account. If your spouse leaves you an IRA, you can designate yourself as the owner of the account and manage it as if it had always been yours. You can also roll the deceased’s IRA over to your own account. This option is only open to spouses, and if you choose it, you should make sure to follow the rules for Required Minimum Distributions (RMDs).
  1. Transfer the money to an inherited IRA. Also known as a beneficiary IRA, an inherited IRA is an account you open upon inheriting an IRA. As the IRS explains it, you “can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.” You can either transfer funds to a traditional IRA, in which case the distributions will be taxable, or into a Roth IRA where it can grow tax-free, but is subject to the rules governing Roth IRAs. When choosing between a traditional or Roth IRA, I suggest you consider your retirement date and your tax bracket today versus what it may be in the future. This option is open to non-spouses, who will typically have to take RMDs no later than December 31st in the year following the original account owner’s death.
  2. Decline the money. I know it sounds crazy, but there may be times when you don’t want the money. Maybe you’d have a huge tax consequence. Maybe you’d prefer the money go to your sister, or your child. When you use this option, which is called “disclaiming,” the IRA passes to other eligible beneficiaries. Unfortunately, it’s not as simple as it sounds. You must act within 9 months of the original IRA owner’s death, and you must be very careful about documenting your decision or you could incur negative tax consequences for you and the other beneficiaries. And if that wasn’t complicated enough, the documentation rules vary from state to state.

Remember, this post is only a primer. Not only are there more details and deadlines, but IRA beneficiary rules sometimes change with new laws. I strongly suggest meeting with a professional after (or even better, before) inheriting an IRA. RPOA’s advisors understand the issues and opportunities regarding inherited IRAs. They can advise you regarding your options, and build you an entire financial plan that incorporates your new IRA. Contact us today.

Ken Moraif, CFP®, MBA
Senior Advisor at Retirement
Planners of America

Author of Buy, Hold, and SELL! Author Page