In today’s episode, Adam Bergman, Esq., discusses your options when you inherit an IRA from a non-spouse, since they are more complicated than when you inherit it from a spouse, which you can take over the plan as your own.
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IRA Financial was founded by Adam Bergman, a former tax and ERISA attorney who worked at some of the largest law firms. During his years of practice, he noticed that many of his clients were not even aware that they can use an IRA or 401(k) plan to make alternative asset investments, such as real estate. He created IRA Financial to help educate retirement account holders about the benefits of self-directed retirement plan solutions.
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If you have inherited an Individual retirement account (IRA) from a family member or loved one, you may be wondering what your options are and what you can do with the inherited funds. An inherited IRA can be a valuable asset, and there are certain rules and options you should be aware of when it comes to managing and using the inherited funds.
One option you have with an inherited IRA is to take a lump-sum distribution. This means that you would withdraw the entire balance of the account at once. However, this option comes with tax implications, as the distribution would be considered taxable income in the year it is received. Additionally, if you are not yet of retirement age, you may also be subject to early withdrawal penalties.
Another option is to take required minimum distributions (RMDs) over your lifetime. If you choose this option, you would be required to take a minimum distribution from the inherited IRA each year based on your life expectancy. This allows the funds to continue growing tax-deferred, and you would only pay taxes on the distributions as you receive them.
You also have the option to take RMDs over a five-year period. This means that you can take distributions from the inherited IRA over a five-year period, but you have flexibility in how much and when you take these distributions. However, this option also comes with tax consequences, as the distributions would be taxed as income in the year they are received.
It’s important to note that the rules for inherited IRAs can vary based on whether you are the spouse or a non-spouse beneficiary, and it’s important to carefully consider all of your options and consult with a financial advisor or tax professional to determine the best course of action for your specific situation.
In addition to the options mentioned above, you may also have the ability to transfer the inherited IRA funds into your own IRA, which can provide more flexibility and control over the assets. However, there are specific rules and deadlines that must be followed to complete a successful transfer.
Inherited IRAs can be a complex and sometimes overwhelming asset to manage, but understanding your options and making informed decisions about how to manage the funds can help you make the most of this inheritance. It’s important to take the time to carefully consider all of your options and consult with experts who can help guide you through the process.
In conclusion, an inherited IRA can provide a valuable source of retirement income, but it’s important to carefully consider your options and make informed decisions about how to manage and utilize the funds to maximize their potential. Seek guidance from financial professionals to ensure that you are making the best decisions for your financial future.
Great video. I inherited a non-spousal IRA a few years ago and rolled that into an inherited IRA account. My financial planner helped me work out an interesting way to deal with those funds.
I'm self employed and have a solo 401K account. Each year, I take a distribution from the inherited IRA equal to the solo-K contribution limit and pay taxes on that. Then I contribute that withdrawn amount to the solo-K and get a tax deduction for that contribution. Then I convert that solo-K contribution into a Roth IRA, and again pay tax on that conversion. I should have that inherited IRA account emptied and moved to my Roth next year when I plan on retiring. In the end, it's similar to taking RMDs over time and paying tax on withdrawals, but I end up with the withdrawn funds in a Roth IRA. Also doing yearly Roth conversions from my own IRA, this year the Roth balance exceeds the IRA balance!
This isn't a general strategy for most folks, but in specific situations it's an option to consider.