It’s important to understand the rules around inheriting an IRA – here’s some quick tips.

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Inheriting an IRA from a loved one can be a bittersweet experience. While it’s an honor to have someone entrust their savings to you, managing an inherited IRA can be complicated if you’re not familiar with the rules and regulations of the process. One mistake could mean hefty penalties and taxes, which could significantly reduce your inheritance. Therefore, it is essential to be aware of some simple but fundamental rules that will help you avoid making mistakes with your inherited IRA.

Firstly, it’s crucial to remember that inherited IRAs have different rules than traditional IRAs or Roth IRAs that you may already have. The primary difference is that you cannot contribute to an inherited IRA, and you must take required minimum distributions (RMDs) every year from the account. RMDs are the minimum amount you must withdraw from your inherited IRA each year, starting the year after the original account owner’s death.

Secondly, the requirements regarding RMDs depend on who the original account owner was and the age they were when they passed away. For instance, if the account owner was under 70½ years of age at the time of death, you could choose to take distributions over ten years or more. However, if the owner was 70½ or older, you must take RMDs based on the original account owner’s life expectancy.

The third important rule is to understand the tax implications of your inherited IRA. Withdrawals from traditional IRAs are generally taxed as ordinary income. Therefore, if you’re taking distributions from an inherited traditional IRA, you’ll pay taxes on the amount withdrawn each year. Roth IRA withdrawals, on the other hand, are tax-free as long as the account owner had the account for at least five years before their death.

Finally, it’s important to name a beneficiary for your inherited IRA. By default, the IRA custodian will name the original account owner’s estate as the beneficiary if no designated beneficiary is named, and that could mean your inherited IRA will be subject to probate court. This could result in high costs and delayed distributions of your inherited IRA assets.

In conclusion, managing an inherited IRA requires careful consideration and attention to detail. By understanding the basic rules surrounding your inherited IRA, you can minimize your tax liability and maximize your inheritance. For more information, speak to a financial advisor or tax professional who can guide you through the process and ensure that you don’t make a mistake with your inherited IRA.