7 Things to Know About Inherited IRAs

Inheriting an IRA is an intersection of estate planning, financial planning, and tax planning. What is an inherited IRA? It is when you inherit an account with tax advantages after the death of the owner. You will need to move the assets from the original owner’s name into your name as the beneficiary. There are specific rules that will apply to these accounts. In this article, we will go over 7 things to know about inherited IRAs.

1. Spouses Get the Best Treatment

If you are a spouse and you inherit an IRA there are a few choices that you can make regarding the account. First, you can roll the IRA over into your name and treat it as your own for tax purposes. The spouse is the only beneficiary that can do this. Second, you can treat it as if you are rolling it over into another account such as a 403(b) plan.

2. Options for Taking Your Money

There are two types of beneficiaries, eligible designated beneficiary and designated beneficiary. What type of beneficiary you are will affect how you can take the money out of the IRA account. An eligible beneficiary is an individual who is chronically ill or disabled, a minor child, or not more than ten years younger than the designated beneficiary. If you do not fall into the previous categories, you are designated beneficiary.

If you are an eligible designated beneficiary, you have the special ability to transfer the inherited IRA into your name and take Required Minimum Distributions based on your life expectancy or that of the original account holder. Designated beneficiaries do not have that option.

Both eligible beneficiaries and designated beneficiaries can utilize the next method for withdrawals. With this method, you take the funds out within a 10-year period from the original owner’s death. You must liquidate the account by December 31^st of the 10^th year after the original owner’s death.

3. You Need to Be on Alert for Year of Death Required Minimum Distributions

You need to know if the original account holder was taking RMDs. If this is the case, you need to ensure the account holder had taken the RMD before they passed. If they have not you will need to take that distribution before the last day of the calendar year. In the case the account holder is not taking RMDs, you do not need to worry about this.

4. Take Advantage of Estate Tax Breaks

If you inherit a traditional IRA, any withdrawals are subject to income taxes. However, if the estate you inherited from was subject to estate tax you have a deduction available to you. The estate tax limit for 2024 is $13.61 million. You can deduct any amount of income tax you owe from the estate taxes the account had to pay.

5. Keep Beneficiary Forms Up to Date

It is vital that you keep your beneficiary designations up to date. If you have no beneficiary designation your account will go into your estate. If this happens your beneficiaries will need to liquidate funds within five years of the death of the original account holder.

6. Improperly Drafted Trusts Can Cause Trouble

Trusts can be beneficiaries of IRA accounts. But if you do this you need to make sure the provisions are properly drafted. If the custodians cannot see through the trust to determine the beneficiaries, the five-year distribution requirement would take over.

7. Roth IRAs Can Help with Taxation

When you inherit a Roth IRA, you are not taxed on withdrawing the principal. Spouses can still rollover the account into their name and treat it as their own.

Inheriting IRAs

Inheriting IRAs can be complex, so it is important you understand these 7 things to know about inherited IRAs. It will put you in the best situation to make the most of your inheritance. You can also meet with a qualified investment advisor to help you profit from your inheritance.

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