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Individual Retirement Accounts (IRAs) can be a valuable asset to pass on as an inheritance. IRAs offer significant tax advantages and can provide your loved ones with long-term income.

When considering leaving an IRA as part of your estate plan, there are a few important factors to keep in mind. Below, we’ll outline some key considerations to help you make informed decisions about leaving an IRA as an inheritance.

1. Choose Your Beneficiaries Carefully

One of the most important steps in leaving an IRA as an inheritance is selecting your beneficiaries. This is crucial, as the tax implications and distribution rules for an inherited IRA can vary depending on who the beneficiary is and their relationship to the original owner.

For example, if you leave an IRA to your spouse, they can choose to roll the IRA over into their own IRA and avoid taking distributions until they reach age 72. Non-spouse beneficiaries, on the other hand, generally must begin taking required minimum distributions (RMDs) from the inherited IRA immediately.

It’s important to review your beneficiary designations regularly to make sure they reflect your current wishes. If you don’t name a beneficiary, the IRA will typically pass to your estate and may be subject to probate.

2. Understand the Tax Implications

IRAs offer significant tax advantages during the owner’s lifetime. However, when the account is passed on as an inheritance, the tax implications can change.

As previously mentioned, non-spouse beneficiaries must start taking RMDs from the inherited IRA immediately. These distributions are taxed as ordinary income and can significantly impact the beneficiary’s tax bracket.

Additionally, beneficiaries may have the option to take distributions over their own life expectancy or withdraw the entire balance within five years of inheritance. The decision the beneficiary makes can have a significant impact on the amount of taxes owed on the inherited IRA.

3. Consider Inheriting Roth IRAs

Roth IRAs can be an especially attractive asset to inherit, as distributions from Roth IRAs are typically tax-free. This means that beneficiaries won’t need to worry about taking RMDs or paying taxes on their distributions.

Another benefit of inheriting a Roth IRA is that the beneficiary can continue to make contributions and grow the account tax-free. This makes it an especially valuable asset to pass on to younger beneficiaries who have a longer time horizon for saving and investing.

4. Consult With a Financial Advisor

Leaving an IRA as an inheritance can be a complex process, with a number of factors to consider. For this reason, it’s important to work with a financial advisor who can help you navigate the various rules and regulations.

A financial advisor can help you select beneficiaries, review your tax implications, and evaluate your overall estate plan. They can also guide you through the process of completing beneficiary designations and ensure that your wishes are carried out.

In conclusion, leaving an IRA as an inheritance can be an excellent way to provide for your loved ones and leave a lasting legacy. By carefully considering your options and working with a financial advisor, you can ensure that your IRA is distributed in a way that maximizes its value to your heirs.