Keeping your retirement goals top of mind is key to keeping your strategy on track, regardless of your age.
Inheriting an IRA: The Rules Matter
Inheriting an IRA can provide you with greater financial security and potential key tax advantages. However, those benefits can quickly evaporate if you don’t understand the available options and IRS rules.
“The rules for inheriting an IRA or any other retirement account are often quite complex,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “It’s very important to understand what you can and cannot do in the inheritance process to take full advantage of the tax benefits of inheriting a retirement account and also to avoid any penalties.”
As a beneficiary, your options depend on the deceased account holder’s age and relationship to you. Here’s a quick overview of the options you have in each scenario, although you should consult a tax professional for more in-depth information regarding potential tax implications.
If you’re the beneficiary of a Traditional IRA, it’s important to know if the account holder died before or after the required beginning date (RBD) for a required minimum distribution (RMD). The RBD is April 1 following the year in which the deceased IRA holder reached age 70½. If the account holder died after that date, you should review the account to determine if action is needed to satisfy the RMD for the year of the deceased IRA holder’s death.
If you’re a spouse who’s inheriting a Roth or a Traditional IRA, you can elect to take a lump sum distribution, transfer the funds to an IRA in your name and treat the funds as your own, or transfer the funds to an inherited IRA and take distributions over the longer of the deceased IRA holder’s life expectancy or your life expectancy.
If the IRA holder died prior to the RBD, you also have the option to transfer the funds to an inherited IRA and distribute the balance by Dec. 31 of the year marking the 5th anniversary of the account holder’s death.
If you’re a non-spouse beneficiary, you will not be able to transfer the funds to an account in your own name. However, you can choose to take a lump sum distribution, or transfer the funds to an inherited IRA and take annual distributions based on your life expectancy. If the account holder died prior to the required beginning date, you also can transfer the funds to an inherited IRA and distribute the entire balance by Dec. 31 of the year marking the 5th anniversary of the account holder’s death.
For more information on inheriting IRAs or any other retirement account, you can review the IRS publication 590, which provides more details.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
This material is for informational purposes only and Scottrade is not responsible for any errors or omissions. The information is subject to change without notice and should not be construed as a recommendation or investment advice. Please consult a tax, legal, or financial advisor with questions regarding your investment objectives and personal tax or financial situation.
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