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One of the most important decisions one can make when receiving an inherited IRA is to make sure they don’t make a crucial mistake – cashing out the funds too soon. An inherited IRA is a special type of individual retirement account that is given to a beneficiary after the original owner’s death, and it comes with unique rules and regulations that need to be followed.
One thing to never do with an inherited IRA is to take a lump sum distribution. While it may seem tempting to receive a large sum of money all at once, this can have severe consequences in terms of taxes and missed opportunities for growth.
When a beneficiary cashes out an inherited IRA, the entire amount is considered taxable income in the year it is received. This sudden influx of funds can push the beneficiary into a higher tax bracket, potentially subjecting them to a higher tax rate. Additionally, the large sum of money may be subject to estate taxes, further reducing the overall amount received.
By taking a lump sum distribution, the beneficiary not only faces significant tax implications, but they also lose the opportunity for the funds to continue growing tax-deferred. One of the main advantages of an inherited IRA is that it allows the beneficiary to stretch the distributions over their lifetime or the lifetime of a designated beneficiary. This means that the funds can continue to grow and accumulate tax-free over several years, providing a significant financial advantage.
Instead of cashing out the inherited IRA, it is wiser to consider other options that will maximize the potential benefits. One such option is to open an inherited IRA account and continue the tax-deferred growth. This account is commonly referred to as a “stretch IRA.” By selecting this option, the beneficiary can take required minimum distributions (RMDs) over their lifetime, based on their own life expectancy.
In addition to the stretch IRA option, it may also be beneficial to explore the possibility of a Roth conversion. If the original IRA was not a Roth IRA, the beneficiary can convert it to a Roth IRA. While this conversion will result in an immediate tax liability, the funds in the Roth IRA will grow tax-free, and distributions will be tax-free as well.
Another crucial consideration is to ensure that the inherited IRA is properly titled. The beneficiary should make sure that the account is titled as an inherited IRA with the correct name of the original IRA owner and their date of death. This ensures that the IRS recognizes the account as an inherited IRA, allowing for the appropriate distribution rules to be followed.
In conclusion, it is crucial to never cash out an inherited IRA as a lump sum distribution. This can lead to significant tax implications and a missed opportunity for continued tax-deferred growth. Instead, beneficiaries should consider options such as opening an inherited IRA account or converting to a Roth IRA. By following these guidelines, beneficiaries can make the most out of their inherited IRA and secure their financial future.
Very good advise. I love watching your videos. So much information.
i thought the new rule was 10 years with no mandatory rmd until the whole thing must be liquidated by year 10.
I inherited my Husband's 401K since he was 7yrs older the 401 company started RMD 2yrs ago. to.my b surprise! It was more$ than you have on your board 40%? and same 105,000. Why?
Suppose you die at 68 yrs old with 2 million in your IRA. You want to spilt it evenly between your 3 kids and your wife. How should this be done ?
This is an old video and the info re. RMD for inherited IRA is now wrong. The current rule requires the inherited IRA to be drained in a few years.
Never, mix to different kinds of Funds Together ever. Sorry bro.
New rule for inherited IRA is that has to be drained in 5 years.
So in your example, surviving spouse has to take about $20,000 a year.
Josh, I appreciate your channel and advice. Your videos and the personal consult has given me the peace of mind that we are going to have a safe and sound last quarter of our lives.
I agree in your example the IRA from her husband should not rolled over to her IRA. She should keep her husband IRA as an inherited account to avoid the 10% penalty on any withdrawals before 59. However, her husband age does factor in because any RMD for a surviving spouse is not required until her deceased husband would have reached age 72 as if he was still living because he was under that age at the time of death.
I have an inherited ira from my uncle. Im 65 have had 4 years. My understanding is the rmd was based on his age at his death, not my age. Is this right? I didnt roll the account to me think its a TOD.
Thank you for your valuable information. I did not know that, I will pass that on to my friends and family. God bless you and your family.
I was under the belief that inherited IRAs had to be kept in whatever the deceased had it in, without the ability to change the investment funds (ie, did not have the ability to change the inherited IRA into bonds). After 59.5, rolling an inherited IRA into your own, would then give you the ability to make changes – after the rollover. Is this not correct?