Can You Convert an Inherited IRA?
An inherited IRA comes with its own set of rules and distribution options that vary based on beneficiary type and age at death of its original account owner. Furthermore, withdrawal options may also depend on which beneficiary type inherits it.
Eligible designated beneficiaries (e.g., minors, disabled individuals and individuals 10 years younger than the owner) can take advantage of the “stretch” option to reduce annual taxable income while prolonging tax-deferred growth.
Conversion Options
An expert financial advisor can be instrumental in helping navigate through the options associated with inheritance IRA distribution rules and options available to them.
Prior to 2020, beneficiaries of IRAs could use a strategy known as the “stretch IRA.” This allowed them to spread out required minimum distributions (RMDs) over many years instead of in one lump sum, potentially prolonging investment life and tax-deferred growth over decades. Unfortunately, with the passing of SECURE Act 1.0 and 2.0 in 2019, this option no longer existed.
Surviving spouses can convert traditional IRAs to Roth IRAs to enjoy tax-free withdrawals, while non-spouse beneficiaries must empty inherited Roth IRAs within 10 years or face income taxes on withdrawals; alternatively they may disclaim them, leaving them for other beneficiaries or leaving them to estate – though doing this requires careful consideration of current and future tax landscape.
Taxes
Prior to the SECURE Act going into effect in 2020, many individuals attempted to make their IRA assets stretch further by designating young children as beneficiaries or rolling over into an IRA under their own name and taking annual minimum withdrawals (RMDs), which allowed for funds to remain tax-deferred for years while giving other beneficiaries access. Now there are strict 10-year withdrawal requirements on nonspouse beneficiaries.
As this law stipulates that any funds left in an inherited IRA must be spent within 10 years or face penalties, adult children often opt to convert inherited IRAs into Roth accounts as an option to reduce this financial strain. Converting from pretax retirement funds into tax-free accounts may provide substantial long-term advantages; however, this option must be carefully planned out with regards to both relationships between original account owner and beneficiary; seek advice from a financial advisor in this matter before making your final decision.
Fees
Individual Retirement Accounts, or IRAs, provide tax-advantaged growth. When someone passes away, these assets may pass onto beneficiaries and have lasting financial ramifications that can have major ramifications.
Beneficiaries of an IRA have several options when inheriting assets: They can withdraw them as a lump sum payment, transfer them into their own IRA account or convert the assets to Roth IRAs – each option offering different advantages and disadvantages that could affect each beneficiary differently.
Beneficiaries need a clear understanding of the tax rules pertaining to inherited IRAs in order to make sound decisions, which is why working with a financial advisor is so essential – they will help provide guidance based on individual needs and goals, helping avoid costly errors due to missteps. Contact Bankrate now to set up a Discovery call with one of these professionals!
Investment Options
If you inherit an IRA, it’s important to remember several points when deciding the best way to invest. Make sure you are familiar with all available investments in the account based on your financial situation and risk tolerance; growth-oriented or conservative ones could be best depending on individual preferences.
If an original account owner began taking Required Minimum Distributions (RMDs) prior to their death, you may be able to “stretch out” these withdrawals over your lifetime and reduce taxable income while prolonging tax-deferred growth. This option is only available to spouses and non-spouse beneficiaries who meet specific criteria.
One option is to transfer the assets into your name via an Individual Retirement Account, giving you more control of how to invest them. Tax rules regarding this are complex; professional advice should be sought before proceeding. Depending on the type of retirement account and its owner (deceased or not), other possibilities could also exist depending on whether or not their estate left the funds in trust.
Comments are closed here.