Tags: Retirement | inherited ira

You've Inherited an IRA, What Do You Do Now?

By    |   Wednesday, 29 Apr 2015 12:48 PM

An inherited IRA often comes with mixed feelings, as the positive of a financial windfall is countered by the loss of a loved one. Once the initial feelings of sadness subside, beneficiaries have decisions regarding what to do next.

Here are some options:

1. Transfer the money to the spouse's account. This option only applies to the beneficiary's spouse, and includes converting the funds into a Roth IRA. The rules regarding how and when to make mandatory withdrawals, and the amounts of minimum required distributions (MRDs), are the same as if the account was always held by the spouse.

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The decision for a spouse ultimately comes down the spouse's age and income needs, the age of the IRA owner, and the type of IRA inherited. A non-spouse beneficiary doesn't have the option of rolling the assets into their IRA.

2. Transfer the funds to an Inherited IRA. A spouse can also do this, but it is more common if the beneficiary is someone other than the spouse. The money keeps increasing tax-deferred, and can generally be withdrawn immediately without a penalty.

MRDs are still required each year, based on the beneficiary's age and life expectancy. If the beneficiary isn't the spouse, MRDs must begin before the inheritor reaches age 70 1/2, according to Fidelity Investments.

3. Close out the account. The cash in the inherited account would likely be considered ordinary income depending on whether the contributions were pre-tax or post-tax, and the type of IRA. Securing a taxable distribution in a lump sum may bump the beneficiary into a higher tax bracket.

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If you don't need the money right away, it could be a shrewd long-term move to leave the assets alone. The longer the money remains, the longer it will maintain tax-deferred growth. In the case of an inherited Roth IRA, this will mean longer tax-free growth.

4. Disclaim all or part of the inheritance. This essentially passes on the assets to which you are entitled to other eligible beneficiaries. If there are none, the assets return to the original IRA owner's spouse, and finally, to the estate. Such a decision is irrevocable and must be made within nine months of the original IRA owner's death.

In some cases, disclaiming an IRA is done to avoid tax implications. In any event, it is advised to speak with a tax adviser before making any decisions.

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An inherited IRA often comes with mixed feelings, as the positive of a financial windfall is countered by the loss of a loved one. Once the initial feelings of sadness subside, beneficiaries have decisions regarding what to do next.
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Wednesday, 29 Apr 2015 12:48 PM
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