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On this episode of DIY Money, Quint and Daniel discuss how to invest an Inherited IRA….(read more)

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How to Invest an Inherited IRA

Inheriting an Individual retirement account (IRA) is a great way to secure your financial future. An inherited IRA allows you to save for retirement while benefiting from tax advantages. However, knowing how to invest this newly acquired account can be overwhelming. In this article, we will guide you through the steps to effectively invest your inherited IRA.

1. Understand the type of inherited IRA:
There are two types of inherited IRAs: the spousal and non-spousal. Spousal inherited IRAs have more flexibility and offer the option to treat the account as their own. Non-spousal inherited IRAs require a different distribution method. Therefore, it is crucial to determine the type of IRA you have inherited to make informed investment decisions.

2. Review the beneficiary rules:
Each type of inherited IRA comes with specific beneficiary rules, which dictate the required minimum distributions (RMDs). Spousal beneficiaries can use the “roll-over” option to transfer the assets into their own IRA, avoiding RMDs until they reach the age of 72. Non-spousal beneficiaries are required to take RMDs annually, and the distribution schedule depends on various factors, such as the age of the original account holder at the time of death.

3. Assess your risk tolerance:
Before diving into any investments, it is essential to determine your risk tolerance level. This will help you identify the right investment strategy for your inherited IRA. If you have a lower risk tolerance, you may opt for more conservative investments, such as bonds or mutual funds. For those with a higher risk tolerance, stocks and exchange-traded funds (ETFs) may be a suitable choice.

4. Review the investment options:
Evaluate the available investment options within the inherited IRA. Some plans may limit your investment choices, while others offer a broad range of options. Take the time to review and understand the investment options available to you. It is also beneficial to seek advice from a financial advisor to ensure you make informed decisions aligned with your goals.

5. Diversify your investments:
One of the keys to successful investing is diversification. By spreading your investments across different asset classes, you reduce the risk associated with having all your eggs in one basket. Diversification helps protect your portfolio from market volatility and optimizes your chances of long-term growth. Consider allocating your inherited IRA funds across stocks, bonds, real estate, and other investment vehicles to achieve a well-balanced and diversified portfolio.

6. Monitor and adjust your investments:
Investing is an ongoing process that requires regular monitoring and potential adjustments. Stay informed about market trends and economic conditions. Review your investment performance periodically and rebalance your portfolio if needed. Depending on your risk tolerance and long-term goals, you may need to adjust your investments to align with your changing circumstances.

7. Seek professional advice:
Investing inherited IRAs can be complex, especially if you are unfamiliar with the intricacies of investment strategies and tax implications. Seeking guidance from a financial advisor who specializes in retirement planning and inherited IRAs can provide invaluable insight. They can help you navigate through the complexities of investing your inherited IRA, optimize your investments, and ensure compliance with the IRS rules and regulations.

Investing an inherited IRA is a significant responsibility that requires careful consideration and planning. By understanding the type of inherited IRA, reviewing beneficiary rules, assessing risk tolerance, reviewing investment options, diversifying investments, monitoring and adjusting investments, and seeking professional advice, you can effectively invest your inherited IRA and secure a prosperous financial future. Remember, it is always advisable to consult with a qualified financial advisor to ensure you make informed investment decisions tailored to your specific circumstances.