Inherited IRA’s and Required Minimum Distributions. Attorney and Advisor Chris Berry discusses how RMDs work with inherited IRAs….(read more)

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Inherited IRAs: A Guide to Managing Your Inheritance

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When it comes to managing your inheritance, one financial asset that you may receive is an inherited Individual retirement account, commonly known as an Inherited IRA. While the process of inheriting an IRA can be overwhelming, understanding the basics can help you make informed decisions regarding your financial future.

So, what exactly is an Inherited IRA? It is essentially an IRA that is passed down to a beneficiary designated by the original account holder after their passing. This type of IRA typically comes with different rules and regulations compared to a regular IRA, mainly due to the fact that the beneficiary is not the original account owner.

The first thing to consider when inheriting an IRA is whether you are a spouse or a non-spouse beneficiary. Spouse beneficiaries have the option to take over the IRA as their own, giving them the flexibility to treat it as if it were their original retirement account. On the other hand, non-spouse beneficiaries have stricter rules to follow.

For non-spouse beneficiaries, it is important to be aware of the timeline for taking Required Minimum Distributions (RMDs). In most cases, the beneficiary must start taking distributions from the account by December 31st of the year following the original account holder’s date of death. The amount that must be withdrawn each year is based on the beneficiary’s life expectancy and is subject to income tax.

One option available to non-spouse beneficiaries is the Stretch IRA strategy. This allows the beneficiary to take out smaller annual distributions over their own life expectancy. By stretching out the distributions, beneficiaries can potentially minimize their tax liability and continue the tax-deferred growth of the account.

Another option for non-spouse beneficiaries is the option to withdraw the entire balance of the inherited IRA within five years of the original account holder’s death. While this may be advantageous for some beneficiaries, it is essential to consider the tax implications and potential impact on your financial plan.

It is important to note that Inherited IRAs cannot be contributed to or mixed with other retirement accounts. They are standalone accounts that must be managed separately from your own retirement savings. Keeping them separate can help avoid confusion and ensure that the required distributions are taken on time.

Additionally, consulting with a qualified financial advisor or tax professional is crucial when dealing with Inherited IRAs. They can provide personalized guidance based on your individual circumstances and help you navigate through the complex rules and regulations surrounding these accounts.

In conclusion, inheriting an IRA can be a significant financial asset, but it comes with its own set of rules and considerations. Understanding the options available to you as a beneficiary can help you make informed decisions regarding your inheritance. Be sure to consult with professionals who specialize in retirement planning and tax strategies to ensure you are maximizing the benefits of your Inherited IRA.