Receiving an inherited IRA can be a difficult time, especially if you don’t know what to do with one. In today’s episode of AdBits, Adam Bergman, Esq. discusses exactly what an inherited IRA is, how it works, and what you can actually do with it.
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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.

IRA Financial is a retirement account facilitator, document filing, and do-it yourself document service, not a law firm. IRA Financial does not provide legal services. No attorney-client relationship exists between Client and IRA Financial Group, its management, salespersons or IRA Financial’s in-house legal counsel. IRA Financial provides IRA retirement facilitation service and CANNOT provide Client with legal, investment, or financial advice. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

IRA Financial is not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required, the services of a competent professional person should be sought. (From a Declaration of Principles jointly adopted by a Committee of the American Bar Association & a Committee of Publishers and Associations.). The scope of Professional Services does not include the costs of any custodian related services.

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Inherited IRA Rollover Rules: Understanding AdBits

Inheriting an Individual retirement account (IRA) can provide a significant financial boost, allowing you to continue growing the funds while benefiting from favorable tax treatment. However, it is crucial to understand the specific rules and regulations surrounding the rollover of an inherited IRA, especially when it comes to AdBits.

AdBits, a term coined by financial experts, refers to the ad hoc regulations regarding inherited IRA rollovers. These rules dictate how beneficiaries can transfer funds from an inherited IRA to their own account while adhering to tax guidelines. Understanding these rules can save beneficiaries from potential tax penalties and maximize the potential benefits of inheriting an IRA.

One of the primary considerations is determining whether the beneficiary is a surviving spouse or a non-spouse. Surviving spouses have more flexibility and options compared to non-spouse beneficiaries.

For a surviving spouse, the most common choice is to roll over the inherited IRA into their own IRA. This Roll-In rule allows them to consolidate the inherited IRA with their existing retirement accounts, increasing the potential for growth and simplifying future withdrawals. Additionally, the spouse can continue contributing to the IRA, subject to their own contribution limits and age restrictions.

On the contrary, non-spouse beneficiaries have fewer choices. They cannot roll over the inherited IRA into their own account, but they have several other approaches to consider. One option is to transfer the funds directly into an inherited IRA in their name. This preserves the tax advantages of the inherited IRA and allows for continued tax-deferred growth. However, it’s essential to remember that there are ongoing minimum withdrawal requirements based on the beneficiary’s life expectancy.

Another option is to consider a lump-sum distribution. While this may appear convenient, the entire amount of the inherited IRA would be subject to income taxes in the year of distribution. This option is often chosen if the beneficiary is in urgent need of funds or if it makes more financial sense due to tax implications.

Alternatively, a non-spouse beneficiary can opt for a stretch distribution. This approach involves spreading out the required minimum distributions (RMDs) over their life expectancy, allowing for longer-term tax-deferred growth. However, it is important to note that the stretch distribution option was significantly limited by the passage of the SECURE Act in 2019. Non-spouse beneficiaries who inherited an IRA after December 31, 2019, must now withdraw the entire inherited IRA balance within ten years, with some exceptions for certain eligible designated beneficiaries.

Navigating the AdBits regulations can be complex, and seeking professional advice is highly recommended when determining the best strategy for an inherited IRA rollover. Financial advisors specializing in retirement planning can assess individual circumstances, tax implications, and long-term goals, ensuring beneficiaries make informed decisions.

Another crucial aspect to consider is the importance of regular reviews for inherited IRAs. Tax laws and regulations change frequently, and beneficiaries need to stay updated to make the most of their inherited IRA’s potential. An experienced financial advisor can provide guidance on any new developments and help beneficiaries adapt their strategies accordingly.

In conclusion, understanding the AdBits rules for inherited IRA rollovers is essential for maximizing the benefits of this financial windfall. Whether you are a surviving spouse or a non-spouse beneficiary, knowing your options and seeking professional advice are critical steps to take. By making informed decisions and staying up-to-date with evolving tax regulations, you can ensure a prosperous financial future while honoring the intentions of the original IRA owner.