Inherited IRAs are often something we don’t want to think about, but odds are you or a close family member will be inheriting an IRA in your lifetime. There are currently 10s of trillions of dollars residing in US retirement accounts, and roughly 2/3 of that money belongs to people aged 55 and up. There will be an unprecedented transfer of wealth over the next 30 years, and if you happen to be the recipient of an inherited account, it’s very important that you understand and follow the IRS rules regarding these types of accounts. Attendees will also learn about the Secure Act – new legislation affecting Inherited IRAs….(read more)

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An inherited IRA is an individual retirement account that is passed on to a beneficiary after the death of the original account holder. Inherited IRAs are typically created by people who wish to provide a legacy for their loved ones or to minimize tax burdens after their passing. Understanding the rules and regulations surrounding inherited IRAs is important for anyone who might be the beneficiary of such an account.

When an IRA is inherited, the beneficiary has several options for how to handle the account. They can choose to take a lump sum distribution, which means they receive the entire balance of the account at once. This can be subject to taxes and penalties, so it may not be the best option for everyone.

Another option is to withdraw the funds over the course of five years. This can also result in taxes and penalties, but it allows the beneficiary to spread out the distributions over several years. This can be a good choice if the beneficiary needs the money right away, but it may not be the best long-term solution.

A third option is to take distributions over the beneficiary’s lifetime. This can be an attractive option because it allows the account to continue to grow tax-deferred while providing a steady stream of income for the beneficiary. This option requires the beneficiary to take a minimum distribution each year determined by an IRS calculation based on their age and life expectancy. This option can be useful for beneficiaries who do not need the money right away and want to maximize the tax benefits of the account.

It is important to note that certain rules apply when it comes to inherited IRAs. The beneficiary must begin taking required minimum distributions no later than December 31 of the year following the year of the original account holder’s death. The amount of the required minimum distribution is based on the beneficiary’s life expectancy, so it may change from year to year. Failure to take the required minimum distribution can result in hefty penalties.

Inherited IRAs can also be subject to taxes, depending on the circumstances. If the original account holder made contributions to the account that were tax-deductible, the beneficiary will be responsible for paying taxes on any distributions they take from the account. If the contributions were made with after-tax dollars, the beneficiary will not owe taxes on distributions.

It is also important to note that certain types of beneficiaries may be subject to different rules and regulations. Spouses who inherit an IRA have more flexibility, as they can choose to treat the account as their own rather than as an inherited IRA. Non-spouse beneficiaries have less flexibility and must follow the rules outlined above.

In conclusion, inherited IRAs can provide a valuable source of income for beneficiaries. However, it is important for beneficiaries to understand the rules and regulations surrounding these accounts and to choose the option that best fits their financial needs and goals. It is recommended that beneficiaries seek the advice of a financial professional to help them navigate the complexities of inherited IRAs.