What to do with Inherited IRAs?

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LEARN MORE ABOUT: IRA Accounts

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Inheriting an IRA can be a financial windfall, but it can also be a confusing and overwhelming situation. Once you inherit an IRA account, you need to make some decisions regarding handling your newly acquired assets. Here are some things you should do with inherited IRAs.

Take your required minimum distributions (RMDs)

If you inherit a traditional IRA, you will have to take RMDs. RMDs are withdrawals you must take from the account each year. The rules for RMDs are different for inherited IRAs and, in most cases, depend on the age of the deceased at the time of their death. The IRS allows beneficiaries to take RMDs over their lifetime, depending on the size of the inherited account. If you do not take RMDs when required, you will incur stiff penalties and taxes.

Consider your tax implications

Upon receiving an inherited IRA, one of your primary concerns should be the tax implications of the account. If you inherit a traditional IRA, the money withdrawn will be taxed as ordinary income. But if you inherit a Roth IRA, withdrawal from the account will be tax-free, as the account had already been taxed. To avoid any unexpected tax implications, it is best to consult with a financial advisor or tax professional.

Transfer the funds properly

If you inherited an IRA from your spouse, you have the option of rolling over the account into your name. This means that the account becomes your IRA, and you will be required to take RMDs based on your life expectancy. If you inherited an IRA from someone other than your spouse, however, you cannot roll it over into your name. Instead, you will need to transfer the funds into an inherited IRA account. This type of account is specifically designed for beneficiaries of IRAs and can help simplify the process.

Consider your investment strategy

Once you have inherited an IRA account, it is necessary to re-evaluate your investment strategy. You need to take into account your goals, risk tolerance, and time horizon. If you have inherited a traditional IRA, you may want to consider continuing with the same investment approach as the original account holder. If you have inherited a Roth IRA, you may want to consider re-evaluating your investment strategy to maximize your tax-free growth potential.

In conclusion, inheriting an IRA can be a significant financial opportunity, but it also comes with a unique set of circumstances. To handle an inherited IRA, you should understand your tax implications, take required minimum distributions, transfer the funds properly, and re-evaluate your investment strategy. Working with a qualified financial advisor, or at least consulting with one, can help you navigate this process. By taking the time to properly manage your inherited IRA, you can maximize its potential for growth and benefit from it for years to come.