What is the Best Thing to Do With an Inherited IRA?

What is the best thing to do with an inherited IRA

Beneficiaries of an Individual Retirement Account (IRA) face many decisions with tax implications, which should be carefully considered before making their selections. A financial advisor can be invaluable in helping to sort through these options.

Before taking any other action, be certain that all required minimum distributions have been made from your deceased owner’s estate. Otherwise, there could be steep penalties in year 10! You can reduce tax liabilities by making withdrawals over your expected lifetime span.

Roll it Over

An IRA rollover occurs when you transfer assets from an inherited IRA into one in your own name, maintaining its tax rules and withdrawal penalties as though you had always owned it yourself. It is an ideal solution for people over age 59 1/2 who wish to avoid the 10% early withdrawal penalty that could otherwise apply if their inheritance IRA were liquidated immediately upon death.

If you are married, a spousal transfer and treat it as your own IRA are options available to you that allow for stretching withdrawals out over your lifetime while reducing taxes.

This option may also be beneficial to individuals who are within 10 years of being younger than the original account owner, are chronically ill or disabled, and who require financial advice before proceeding. A financial professional will help you understand all your options as well as any tax repercussions associated with them – offering impartial, expert financial advice in one click!

Take a Lump-Sum Distribution

If you need access to your money immediately, a lump-sum distribution may be your best bet. This option eliminates the ten-year required minimum distribution rule and allows you to withdraw assets whenever it suits. Unfortunately, however, income tax must still be paid on any taxable distributions and any potential tax-deferred growth within your IRA balance will also be forfeited.

Consider treating the inherited IRA as your own by rolling it over into a new account in your name – either directly between trustees, or indirect through rollover from one IRA account into another IRA account in your name. In either instance, Roth conversion can also be taken advantage of if one was previously available.

This option can help you avoid the 10% penalty for early withdrawals while managing assets according to your own goals and time horizon. Before selecting this path, however, it would be prudent to consult a financial advisor or tax specialist.

Take a Withdrawal

If you are not the surviving spouse of someone who has died, the IRS does not permit you to roll their IRA over into one of your existing accounts; rather, you’ll need to create an “inherited IRA” account specifically in your name and set it up accordingly.

Once your funds have been transferred to an IRA, you have two options for withdrawal: over 10 years or in one lump sum distribution and pay taxes all at once. A single lump sum distribution could put you into a higher tax bracket and result in a larger income tax bill than would otherwise be the case.

As you consider your options, consult with a financial professional familiar with inherited IRAs. Even if you decide to go with the 10-year withdrawal option, having expert knowledge ensure that taxes are paid correctly can ensure your hard-earned savings remain tax-advantaged and continue growing over time.

Disclaim the Inheritance

The rules surrounding inheritance of an IRA account can be complex and can differ depending on whether or not you’re the spouse of the deceased account holder. Typically, however, if this applies to you then you have the option of treating it as your own and reaping tax-deferred growth for years.

If you are not the spouse, however, your options for withdrawing the funds from an IRA account are more limited. When withdrawing them, any taxable distribution must be taxed at its fullest extent; lump-sum distribution can avoid this, but may forego years of potential tax-deferred growth.

Or you could disclaim an inheritance and allow its next beneficiary in line to take its place instead. This option could be beneficial if you’re no longer going to need these funds, or want to reduce income-tax liabilities overall. But you must act quickly and follow all necessary steps when making this choice; so for best results it may be worthwhile consulting a financial advisor before making this choice.


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