Whether you want to leave an inheritance or have inherited an IRA, Reneika Lightbourne shares what you need to know to about inherited IRAs during this webinar.

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For customer inquiries please contact:
Reneika Lightbourne, CISP
Business Development Specialist
RLightbourne@AdvantaIRA.com

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Light Your Legacy: The Basics of Inherited IRAs

When it comes to planning for the future, it’s essential to consider how your assets will be passed onto your loved ones. Individual Retirement Accounts (IRAs) have long been a popular method of building a secure financial future, and one way to ensure the continuity of your IRA benefits even after you’re gone is by creating an Inherited IRA.

What is an Inherited IRA?

An Inherited IRA is an account that an individual inherits after the death of the original IRA owner. It allows beneficiaries to receive and manage the assets of the original IRA while enjoying specific tax benefits. The Inherited IRA can be passed on from generation to generation, providing a lasting legacy.

Setting Up an Inherited IRA

To set up an Inherited IRA, the beneficiary must be designated on the deceased IRA owner’s beneficiary designation form. If no beneficiary was named, the IRA would generally pass through the estate. However, this may lead to negative tax consequences, so it’s crucial to ensure you have designated beneficiaries for your IRA.

Types of Inherited IRAs

There are different types of Inherited IRAs, each with its own rules and benefits:

1. Spousal Inherited IRA: When a spouse inherits an IRA, they have the option to treat the account as their own by rolling it into their existing IRA. This option allows the surviving spouse to defer required minimum distributions (RMDs) until they reach 72 years old, the current age for mandatory withdrawal. Alternatively, they can choose to open an Inherited IRA in their own name, in which case, RMDs begin immediately based on their life expectancy.

2. Non-Spousal Inherited IRA: Non-spouse beneficiaries, such as children or other relatives or friends, have different options. They cannot roll the Inherited IRA into their own accounts but must either distribute the assets within five years of the original IRA owner’s death or take RMDs throughout their lifetime. These RMDs are based on the beneficiary’s life expectancy.

3. Trusteed Inherited IRA: In some cases, a trust serves as the beneficiary for an IRA. A trusteed Inherited IRA provides a way to control the distribution and protect the assets while still benefiting from the IRA’s tax advantages. This option can be beneficial for individuals who wish to have more control over the assets, specify how they are distributed, or protect them from creditors or spendthrift beneficiaries.

Tax Considerations

While Inherited IRAs offer certain tax benefits, it’s crucial to understand the tax implications. The tax treatment varies not only based on the type of Inherited IRA but also depending on whether the original IRA was a traditional or Roth IRA.

Traditional Inherited IRAs are subject to income tax upon withdrawal, with the beneficiary paying taxes at their individual tax rate. On the other hand, Roth Inherited IRAs can provide tax-free withdrawals, as long as specific requirements are met. It’s important to consult a tax professional to ensure compliance with the appropriate tax regulations.

Lighting Your Legacy

Planning for the future involves not just accumulating wealth but also ensuring that it is passed on efficiently and effectively. An Inherited IRA allows for the continued growth of assets while providing beneficiaries with valuable tax benefits. By designating beneficiaries and understanding the rules surrounding Inherited IRAs, you can light your legacy and provide for your loved ones in a meaningful way.