Inherited IRAs

Inherited IRAs
Inheriting money from a loved one or family friend is an occasion in an otherwise difficult time that should be greeted with a certain sense of joy. Joy that the legacy of a loved one has been bestowed upon someone who they cared deeply for to improve their own lives as they see fit. When inheriting retirement funds such as an IRA, SEP IRA, or 401k account, one must keep in mind that the investments inside these accounts were typically made pre-tax and have grown tax-deferred over the years. This money is therefore likely to be taxable when distributed from the account. Furthermore, current laws require that minimum withdrawals begin on pre-defined schedule after the money is inherited – oftentimes creating a new source of taxable income for the beneficiary. Failures to follow these guidelines properly involve steep fines from the IRS including as much as a 50% excise tax on unfulfilled distribution requirements.
The good news is the IRS has established a wide array of options available for beneficiaries to choose from as to how distributions and future characterization of the funds contained within a retirement account can be handled without a painful excise tax. These options typically give a beneficiary some opportunity for efficient tax and future income planning.
Quite unfortunately, however, these available options are not simple to navigate and each option has several short and long-term pros and cons associated with it. To add a layer of complexity, there are calendar deadlines that must be met by the beneficiary to ensure that all options remain available. To illustrate this point, there are over thirty possible distribution and retention alternatives available to a beneficiary of a qualified account depending on factors such as:

● Age of decedent at time of death,
● Length of time since death,
● Amount of distributions taken by the decedent before death,
● Amount of money invested in the account,
● Beneficiary’s relation to decedent,
● Age of the beneficiary,
● Number of beneficiaries included in the inheritance, and
● Life expectancies of the beneficiaries

For tax and investment planning purposes it is important that a beneficiary understand clearly and completely which of the more than thirty options are available to them – and how each of those options can affect their short and long-term financial health.

Spousal Beneficiary Rollover
When a spouse is listed as the beneficiary of a retirement plan, a special rollover option is available to them. This option is known as a Spousal Beneficiary Rollover. A Spousal Beneficiary Rollover is a transfer of a retirement fund’s assets from a deceased spouse to the IRA of a surviving spouse. Because the spousal rollover essentially converts the assets into the surviving spouse’s IRA, this process avoids Required Minimum Distribution rules that would otherwise govern inherited IRAs. A spousal rollover can occur simply by leaving the deceased spouse’s retirement account in tact and renaming the account to match that of the surviving spouse. Another option is to transfer or “Rollover” the funds into the surviving spouse's account. There are certain cases, where it may not make sense not to perform a Spousal Beneficiary Rollover. For example, if a surviving spouse is younger than 59 ½ years of age, a Spousal Beneficiary Rollover would cause withdrawals to be subject to an early withdrawal penalty. However, leaving such assets in an inherited IRA would require minimum distributions which would avoid early withdrawal penalties.

Required Minimum Distribution – RMD

The phrase “Required Minimum Distribution” or “RMD” refers to the minimum amount of money that must be distributed from qualified plans, SIMPLEs, SEPs, and Traditional IRAs. RMDs may be triggered by one of two events. The first is when you reach age 70 ½. The second is upon inheritance of a retirement plan. To calculate the RMD you divide the fair market value of your retirement account by your life expectancy or applicable distribution period using tables published by the IRS. At Dynamic we specialize in navigating the complex maze of options available to a beneficiary of a retirement account. We understand the specific options available to your unique circumstance and can provide expert advice in the short and long-term effect of the choices available to you.

As inheriting IRAs and retirement plans involve complex tax code, this information is not intended to be tax/legal advice. Please consult your tax/legal professional for details regarding each specific situation. Tax information can be sourced at www.irs.gov. Because investors’ situations and objectives vary, this information is not intended to indicate suitability for any particular investor.