What happens when you or your beneficiaries inherit an IRA? Greg Hammond, CFP®, CPA outlines what you can do, can’t do, and need to do with an inherited IRA.

Watch this insightful presentation to learn what you need to know when you inherit an IRA and what you can do to pass on your IRA with less taxes to leave more wealth to the people you care about.

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Inheriting an IRA (Individual retirement account) can be a bittersweet experience. On one hand, you may have received a significant amount of money that can help secure your financial future. On the other hand, navigating the rules and regulations surrounding inherited IRAs can be overwhelming and confusing. So, what do you do when you inherit an IRA?

First and foremost, it’s important to understand the options available to you as the beneficiary of an inherited IRA. The rules and regulations governing inherited IRAs can vary depending on the type of IRA, the age of the original account holder at the time of their passing, and your relationship to the deceased.

One option for handling an inherited IRA is to take a lump sum distribution. This means withdrawing the entire balance of the inherited IRA in one go. While this may seem like the simplest option, it’s important to consider the potential tax implications of taking a large, one-time distribution. In most cases, the entire amount withdrawn will be subject to income tax, which could result in a hefty tax bill.

Another option is to establish an inherited IRA account in your name and take required minimum distributions (RMDs) from the account. The RMDs are calculated based on your life expectancy and the balance of the inherited IRA, and you are required to take a certain amount each year. This option allows you to spread out the tax liability over a longer period of time and potentially continue the tax-deferred growth of the inherited IRA assets.

If you are the spouse of the deceased and you are the sole beneficiary of the inherited IRA, you also have the option to roll over the inherited IRA assets into your own IRA. This allows you to treat the inherited assets as if they were your own and continue to contribute to the account, if you meet the eligibility requirements.

It’s important to note that the rules for inherited IRAs can be complex, and the consequences of making the wrong choice can be costly. Seeking guidance from a financial advisor or tax professional who is familiar with inherited IRAs is highly recommended. They can help you understand your options, evaluate the tax implications of each option, and make an informed decision that aligns with your financial goals.

In conclusion, inheriting an IRA can be a significant financial windfall, but it also comes with a set of responsibilities and decisions that need to be made. Understanding your options and seeking professional guidance are crucial steps in effectively managing an inherited IRA. With the right knowledge and support, you can make informed decisions that will benefit your financial future.