What to Do with an Inherited IRA

Published on October 10, 2017

What to Do with an Inherited IRA

Leaving IRA assets to your beneficiaries carries with it many tax and financial implications, and it is more complicated than inheriting cash from the sale of a family home or other assets.

Factors that influence the “best” or “right” way to handle an inherited IRA include the beneficiary’s age or financial need, whether it is a Traditional or Roth account, and whether the deceased had already begun taking required minimum distributions (if applicable).

The most common strategy is to roll over inherited IRA funds into your own IRA. However, individuals who directly inherit an IRA have several options that should be discussed with a tax attorney, financial planner or accountant due to myriad tax strategies and implications.

1)Surviving spouses

Inheriting a Traditional IRA

Surviving spouses who inherit a Traditional IRA can roll the money into their own existing IRA, which enables the individual to consolidate all IRA assets into a single account. The surviving spouse must take out any required minimum distributions (RMDs), based on the deceased spouse’s age and life expectancy, for the year in which the owner passed away.

The individual may also transfer the assets to an inherited IRA, in which case they remain separate from the surviving spouse’s other IRA assets and are subject to RMDs based on the surviving spouse’s own life expectancy. Your financial adviser can discuss this in more depth with you.

For those who have an immediate or foreseeable need for funds, the other strategy is to take the money out in a lump sum distribution but there will be significant tax implications associated with that for the inheritor.

Inheriting a Roth IRA

Again, you may choose to roll over the assets into your existing IRA and, if you don’t need the funds right away, you can stretch out the tax-saving benefits of a Roth IRA. There may be a reason instead to set up an inherited IRA for a Roth IRA spousal beneficiary. As noted above, the reasons behind any of these options can be complicated and require research and professional consultation.

If you choose to take a lump sum distribution from a Roth IRA instead, you won’t owe taxes (assuming the assets have been in the account for five years following the contribution). However, the assets will no longer benefit from tax-free compounding.

2)Non-spouse beneficiaries

Inheriting a Traditional IRA

These individuals cannot roll inherited IRA assets into their own accounts. If they want to maintain the assets inside of an IRA they must transfer the money to an inherited IRA. The beneficiary may also take the money out in a lump sum and pay ordinary income taxes on the whole amount at that time.

Inheriting a Roth IRA

Roth IRA assets can be transferred into an inherited IRA. The beneficiary must receive the entire distribution by Dec. 31 of the fifth year following the year of the owner’s death or elect to receive distributions during the beneficiary’s own life expectancy. The lump-sum distribution option exists here as well with the same caveat related to loss of tax-free compounding.

Leaving a self-directed IRA

If you are the account owner of a self-directed IRA, make sure your beneficiaries are properly named and listed on the paperwork to preserve the tax advantages of that retirement plan. Check with your plan administrator to ensure all the beneficiaries—primary and contingent—are listed.

Additionally, make sure your heirs understand the many options and benefits of self-direction as a retirement wealth-building strategy, and that they consult with an ERISA attorney or other self-directed retirement professional to continue to invest in alternative assets and maintain the tax-advantaged status of these plans.

Controlling inherited assets in a self-directed retirement plan

If you have inherited a conventional IRA and want to (or must) transfer those assets into an inherited IRA, you may choose to open a self-directed inherited IRA and take control of you investment choices. Savvy investors who know and understand certain nontraditional investments may elect to build their retirement savings through self-direction, and so may choose to self-direct an inherited IRA.

At Next Generation Trust Company, our team can help you open a self-directed retirement plan correctly and provide the guidance to ensure you are investing within IRS guidelines. Our sister company, Next Generation Services, is a third-party administrators of these plans; Next Generation Services manages all the paperwork and reporting, and executes self-directed transactions according to our clients’ instructions. Next Generation Trust Company holds the assets within these plans, offering a streamlined experience for our clients.

Want to learn more about self-directed retirement plans? Read our white papers and contact Next Generation at 888.857.8058 or Info@NextGenerationTrust.com to get started. We’re here to help!

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