IRA’s are one way to pass a legacy on to your children. An inherited IRA can be a good thing but, if you do not know what you are doing, it can also cause a big tax problem for your beneficiaries. Here are the top 7 things to know about inherited IRAs:
1. Name your children (or whomever you want to inherit) as the beneficiaries, NOT your estate. If you name the estate, it will force your beneficiaries to take distributions that much faster (and incur that much more in income taxes).
2. Once you inherit the IRA, figure out how you are going to take the distributions – know your options.
3. If you are a spouse, you can roll the IRA over into your own IRA and the spouse can postpone distributions until he/she turns 70 ½ (even if the original owner was over 70 ½ and taking the minimum required distributions (“MRD’s”) ;
4. If you are not a spouse, you must begin taking distributions from the account by December 31st of the year after you inherit, but you can take the distributions out over your life expectancy (this is known as “stretching” the IRA);
5. If there is more than one beneficiary is listed, they can decide to share the IRA, but then they will be required to take distributions based upon the age of the oldest beneficiary. It is probably a better idea to split the IRA among the beneficiaries, and then each beneficiary can take distributions based upon their own life expectancy (thus, stretching the life of the IRA). You need to check with the IRA custodian to figure out whether this option is available.
6. Things to know if the IRA owner was under 70 ½ when he/she died:
a. Beneficiaries, other than a spouse, can take annual distributions using their own life expectancy (assuming the IRA was split up if there are multiple beneficiaries);
b. Beneficiaries can take distributions over the five years following the original IRA owner’s death (they can take the distributions however they want, so long as the money is withdrawn by the end of the fifth year);
c. Beneficiaries also have the choice to take a lump sum distribution.
7. Things to know if the IRA owner is over 70 ½ when he/she died:
a. The beneficiary can take distributions over the beneficiary’s life expectancy; or
b. The beneficiary can take distributions based on the age and life expectancy of the original owner;
c. The beneficiary can take a lump sum distribution.
If you have questions regarding inherited IRA’s or would like more information, we are happy to help. Laurie Ohall is a Florida Board Certified Elder Law Attorney based in Brandon, Florida. Contact Ms. Ohall today if you need estate planning, elder law, probate or guardianship assistance.