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4 Ways To Be Sure You Don’t Screw Up An Inherited IRA

With Rachel Sheedy, Contributor to the Kiplinger Retirement Report Your spouse or your rich uncle bequeaths you the money in their IRA. Besides being grateful, what do you do? How do you handle such a windfall? Decisions must be made quickly and it...

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With Rachel Sheedy, Contributor to the Kiplinger Retirement ReportYour spouse or your rich uncle bequeaths you the money in their IRA. Besides being grateful, what do you do? How do you handle such a windfall? Decisions must be made quickly and it even becomes more complicated if you’re part of a shared inheritance.Rachel Sheedy takes us through the four steps to take if you find yourself in this position as written for Kiplinger’s Retirement Report below:* Retitle the account. Because you can’t roll the money into your own IRA, you must create a properly titled inherited IRA. "It must include the name of the decedent and the beneficiary, clearly identifying who is who," says Denise Appleby, chief executive officer of Appleby Retirement Consulting, in Grayson, Ga. For example, the account could be retitled to "Mary Smith (deceased August 8, 2016) IRA for the benefit of Joe Smith." You should also name successor beneficiaries.If you want to "stretch" the benefits of the tax shelter over your lifetime, you must take annual withdrawals based on your life expectancy, beginning no later than the end of the year after the year the original owner died. Those distributions are taxable from an inherited traditional IRA, but tax-free from an inherited Roth IRA. Otherwise, you must clean out the account within five years of the owner's death if he died before age 70 or, if he died past that age, you must use the deceased owner’s life expectancy to take distributions.* Split an IRA. While an owner can name multiple IRA beneficiaries, it can pay off for those heirs to divide the IRA after the owner's death. If they remain together on the inherited IRA, the life expectancy of the oldest beneficiary must be used to calculate RMDs.Instead, each beneficiary should set up an inherited IRA so that his or her own life expectancy comes into play. This is particularly important if there is a large age difference between heirs. If a 60-year-old son and a 22-year-old granddaughter are named heirs to a traditional IRA, for instance, separating the accounts would set the 22-year-old's first RMD at 1.6% of the account balance, compared with a 4% withdrawal required by the 60-year-old. That means more of her money can stay in the account to grow tax-deferred. (You can always take more than the minimum if you need to.)The IRA must be split by December 31 of the year after the year the owner died. Each heir can then devise a personal investment strategy and, notes Jeffrey Levine, chief retirement strategist for IRA advice firm Ed Slott and Co., name his or her own beneficiaries.* Pay out a nonperson’s share. If you are named an heir along with a charity or other nonperson entity, you'll want to pay off that share no later than September 30 of the year following the owner's death. Otherwise, you'll lose the chance to stretch the IRA over your own lifetime because all assets must be disbursed within five years of the owner’s death if the owner died before age 70. If the owner died after that age, you'd have to take annual withdrawals based on the deceased's remaining life expectancy, as set out in IRS tables.* Turn it down. What if you think the IRA could be better maximized by the next beneficiary in line? "If the heir does not desire the income or the additional asset, he can disinherit his interest in the IRA," says Joe Heider, president of Cirrus Wealth Management, in Cleveland.For example, a daughter may be the primary beneficiary but decides she wants her children, who were named as contingent beneficiaries, to inherit the IRA. They could stretch distributions out longer and perhaps pay tax on the money...

First published

09/07/2016

Genres

business

Duration

10 minutes

Parent Podcast

The Steve Pomeranz Show

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Episode Description

With Rachel Sheedy, Contributor to the Kiplinger Retirement Report

Your spouse or your rich uncle bequeaths you the money in their IRA. Besides being grateful, what do you do? How do you handle such a windfall? Decisions must be made quickly and it even becomes more complicated if you’re part of a shared inheritance.
Rachel Sheedy takes us through the four steps to take if you find yourself in this position as written for Kiplinger’s Retirement Report below:

* Retitle the account. Because you can’t roll the money into your own IRA, you must create a properly titled inherited IRA. "It must include the name of the decedent and the beneficiary, clearly identifying who is who," says Denise Appleby, chief executive officer of Appleby Retirement Consulting, in Grayson, Ga. For example, the account could be retitled to "Mary Smith (deceased August 8, 2016) IRA for the benefit of Joe Smith." You should also name successor beneficiaries.

If you want to "stretch" the benefits of the tax shelter over your lifetime, you must take annual withdrawals based on your life expectancy, beginning no later than the end of the year after the year the original owner died. Those distributions are taxable from an inherited traditional IRA, but tax-free from an inherited Roth IRA. Otherwise, you must clean out the account within five years of the owner's death if he died before age 70 or, if he died past that age, you must use the deceased owner’s life expectancy to take distributions.

* Split an IRA. While an owner can name multiple IRA beneficiaries, it can pay off for those heirs to divide the IRA after the owner's death. If they remain together on the inherited IRA, the life expectancy of the oldest beneficiary must be used to calculate RMDs.

Instead, each beneficiary should set up an inherited IRA so that his or her own life expectancy comes into play. This is particularly important if there is a large age difference between heirs. If a 60-year-old son and a 22-year-old granddaughter are named heirs to a traditional IRA, for instance, separating the accounts would set the 22-year-old's first RMD at 1.6% of the account balance, compared with a 4% withdrawal required by the 60-year-old. That means more of her money can stay in the account to grow tax-deferred. (You can always take more than the minimum if you need to.)
The IRA must be split by December 31 of the year after the year the owner died. Each heir can then devise a personal investment strategy and, notes Jeffrey Levine, chief retirement strategist for IRA advice firm Ed Slott and Co., name his or her own beneficiaries.

* Pay out a nonperson’s share. If you are named an heir along with a charity or other nonperson entity, you'll want to pay off that share no later than September 30 of the year following the owner's death. Otherwise, you'll lose the chance to stretch the IRA over your own lifetime because all assets must be disbursed within five years of the owner’s death if the owner died before age 70. If the owner died after that age, you'd have to take annual withdrawals based on the deceased's remaining life expectancy, as set out in IRS tables.


* Turn it down. What if you think the IRA could be better maximized by the next beneficiary in line? "If the heir does not desire the income or the additional asset, he can disinherit his interest in the IRA," says Joe Heider, president of Cirrus Wealth Management, in Cleveland.

For example, a daughter may be the primary beneficiary but decides she wants her children, who were named as contingent beneficiaries, to inherit the IRA. They could stretch distributions out longer and perhaps pay tax on the money...

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