Three Things You Should Know About Inheriting an IRA

Posted on:  August 27th, 2015
By:  Diane Morrison

So, you’ve inherited an IRA.  First of all we’re very sorry for your loss – someone who must have been close to you has passed away.   But, secondly they thought highly enough of you to leave you some money – good for you.    As with any inheritance, things can be very complex and there are a few strings attached in the form of decisions you must make and actions you must take.  With an IRA, you can generally decide to disclaim the account, cash it out, or transfer the assets to an inherited IRA account.  Whatever your course of action, it’s best to begin with these three things:

  1. Do a little digging to find out whether the IRA was fully funded from pre-tax dollars, or alternately, partially with after-tax contributions.  If you find that there were any after-tax contributions, you should file Form 8606 to show that taxes have already been paid on these contributions.
  2. If you decide to keep the IRA, required minimum distributions (RMD) still apply.  If the original owner was already of an age to begin RMDs, one must be taken for the year of the decedent’s death.  Very steep penalties apply if the RMD is missed.  Thereafter, distributions depend upon your own age and inheritance status (i.e., spouse, other beneficiary)  and can generally be spread out over your lifetime based on your life expectancy for maximum tax-deferred compounding of interest or gains.
  3. If you have inherited the IRA jointly with one or more other persons (siblings, perhaps?), you may want to consider splitting it into separate inherited IRAs.  Otherwise, you must set up distributions equally based on the life expectancy of the oldest of the beneficiaries.  Separate accounts must be set up by December 31 of the year following the original account owner’s date of death.

The details can get rather complicated, so don’t forget – as with all your financial decisions, you can always call on us for advice.

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