An inherited Individual Retirement Account (IRA) can be a tremendous boon to the beneficiary. Who can’t use extra money in retirement! Most inherited IRAs are cashed out within six months of the death of the family member. If you do cash it out, there is no way for planning tax strategies! Without proper planning, federal and state taxes can take a sizable bite from the proceeds!
Options for Inherited IRAs:
- Take a lump sum distribution of the entire balance
- Roll the inherited IRA over into a new account and take the distributions over the longer of the life expectancy of the beneficiary or the decedent.
If the account owner died before reaching the date for RMDs (Required Minimum Distributions), the beneficiary has a third option of withdrawing all the funds by the end of the year containing the fifth anniversary of the decedent’s death (The Five Year Rule). In this case, the life expectancy of the beneficiary must be used.
Keep the Beneficiary Designation Up To Date!
Marriage, divorce and the birth of children can change estate plans. The IRA will pass by beneficiary designation and not the Will. Please make sure you keep the beneficiary as you want it.
Titling An Inherited IRA:
An inherited IRA must be titled with both the name of the decedent and the beneficiary plus the word “inherited”. For example, one might title an inherited IRA as “Jane Doe, deceased September 30, 2017, F/B/O Jimmy Doe, beneficiary”. If you just change the name on the IRA, that is a “cash out” so DO NOT just retitle the inherited IRA to the beneficiary. Retitling the account is best done at the brokerage where the decedent held the IRA before the beneficiary rolls it over to his or her own brokerage.
If Decedent Had Turned 70 1/2 Years of Age and Started RMDs:
If the decedent had already turned age 70 1/2 and started taking required minimum distributions, the beneficiary MUST take the required minimum distribution before the end of that year or there is a 50% penalty and you still must take the distribution.
Consider the beneficiary’s age and if there are already ample retirement sources, converting the inherited IRA to a ROTH may be the way to go.
Please call our office BEFORE just cashing out the inherited IRA!