If you are the beneficiary of a Traditional, Simple, or SEP IRA and have just inherited the assets, you have a few reasonably simple options available to you. We’ve created a guide below to help you understand your choices.
Inheriting an IRA means having a new set of financial decisions, and since your financial situation is unique it’s a good idea to ask for help. Your financial advisor should be able to guide you through these options so the transition goes smoothly and you can make a choice that’s right for you.
Below we break it up into two sections: spouses who have inherited IRA assets, versus non-spouses.
Spouse Inheriting an IRA: 3 Options
1) Open an Inherited IRA
You transfer the assets to an Inherited IRA held in the name of the original account owner. You may want to consider this option if you’re under the age of 59 ½ and you want to start taking withdrawals immediately, as the inherited IRA could help you avoid penalties.
Benefits:
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Assets continue to grow tax-deferred
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You can choose your own beneficiaries
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You do not have to pay the 10% early withdrawal penalty when you distribute money. To note, taxes would apply for distributions you make, so keep this in mind especially if you’re considering pulling the money out all at once.
Inherited IRA Distribution Rules:
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If the original account holder was under 70 ½, you must start taking Required Minimum Distributions (RMDs) either on December 31 of the year you inherit the IRA, or the year the account holder would have turned 70 ½ (whichever is later). You can also apply the 5-year rule, which states you have 5 years to withdraw all the assets from the IRA.1
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If the original account holder was over 70 ½, you must start taking RMDs by December 31 of the year after you inherit the IRA. To note, if the original account holder did not take an RMD the year you inherit the IRA, you must take an RMD that year
2) Transfer the Assets into an IRA in Your Name
You can open a new IRA in your name or transfer the assets into an existing IRA in your name.
Benefits:
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Assets grow tax-deferred
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You can choose your beneficiaries
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You can access the funds at any time, however do note that if you’re below age 59 ½ that an early 10% withdrawal penalty could apply.
IRA Distribution Rules:
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You follow distribution rules as if the IRA had been yours the whole time, i.e., you trigger the RMD rules once you turn 70 ½
3) Take the Assets as a Lump Sum
Have all the assets distributed to you in cash at once.
Benefits:
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You receive the funds all at once
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You are exempt from paying a 10% early withdrawal penalty
IRA Distribution Rules:
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You have to pay income taxes on the full amount of the distribution
Children or Non-Spouse Inheriting an IRA: 2 Options
1) Open an Inherited IRA
You transfer the assets into an Inherited IRA held in the name of the original account owner, for your benefit.
Benefits:
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Assets continue to grow tax-deferred
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You can choose your own beneficiaries
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You do not have to pay the 10% early withdrawal penalty when you distribute money
Inherited IRA Distribution Rules:
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If the original account owner was under age 70 ½, and you intend to take annual RMDs, you must begin taking them by December 31 of the year after you inherit an IRA. You may also elect to distribute the assets under the 5-year rule – this allows you to distribute the assets however you’d like without penalty, as long as the assets are all distributed by the end of year 5.1
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If the original account owner was over age 70 ½, and you intend to take annual RMDs, your distributions are spread over your expected lifetime. You must begin RMDs by December 31 of the year after you inherit the IRA or on December 31 of the current year if the original account holder had not taken RMD yet.
2) Take the Assets as a Lump Sum
Have all the assets distributed to you in cash at once.
Benefits:
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You receive all the funds at once
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You are exempt from paying a 10% early withdrawal penalty
IRA Distribution Rules:
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You have to pay income taxes on the full amount of the distribution2
Get Advice When Inheriting an IRA
Our Wealth Managers can help guide you through these choices. We can also help you open the necessary accounts to facilitate the choice that makes sense for you. Give us a call today at 1-800-541-7774 to let us help you. You can also email to wealth@wrapmanager.com.
Leslie is a Client Service Specialist at WrapManager, Inc.
Sources:
1 Fidelity
To the extent this presentation includes any federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
