When it comes to passing on an inheritance, IRAs are at the top of the list of inherited assets. They are a favored option because they allow income taxes to be deferred for a substantial amount of time. Taxes only kick in once the owner begins to receive funds from the account.
It must be emphasized that there are a substantial amount of rules that must be followed when inheriting an IRA. If you have inherited an IRA, it is highly recommended that you speak with a qualified expert who can thoroughly explain your options and the rules that must be followed. One innocent error can be very costly.
Here is a summary of a few options that are available to you when you inherit an IRA.
- Cash Out Option – When you inherit an IRA, you can cash it out and receive the full amount. This is not usually the recommended option because you will be required to pay income taxes on the full amount of the IRA in one payment.
- Spouse Option – When the person who inherits the IRA is a surviving spouse, they have the option to roll the IRA into a new IRA or even merge it with their own existing IRA. This option allows the spouse to continue making contributions and avoid income tax. If the spouse chooses to roll it over into a new IRA, there are specific steps that can be taken to pass the money onto beneficiaries that can protect the money for decades to come.
- Non-Spouse Options – When the original owner of the IRA dies before receiving distribution of the funds, a non-spouse beneficiary can set up a Beneficiary IRA based on the inherited IRA. He can begin taking annual distributions based on his own life expectancy, or he can choose to take a lump sum. If the original owner of the IRA dies after receiving distribution of IRA funds, the one who inherits the IRA will receive distribution of the funds based upon the original owner’s distributions for the first year. The following year’s distributions will be based on the life expectancy of the new owner or the original owner’s remaining life expectancy. This decision will be based on the life expectancy that is longer.
Ultimately, the possibilities of handling an inherited IRA have many intricacies that need the advice of an expert. It is strongly recommended that you obtain the help of a qualified expert who can help you maximize the potential of an inherited IRA.