Andrew and Austin discuss the distribution methods allowed for Inherited IRAs after the SECURE Act.

See Disclosures at: (…(read more)

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

Inherited IRAs: Understanding the Basics

Individual Retirement Accounts (IRAs) are a popular choice for individuals to save for retirement. These tax-advantaged accounts offer a variety of benefits, including potential tax deductions on contributions and tax-free growth on investments until retirement. However, what happens to an IRA when the account holder passes away?

In cases where someone inherits an IRA, it is known as an Inherited IRA. The rules governing Inherited IRAs can be complex and are subject to change, so it is important for beneficiaries to understand the basics to make informed decisions regarding these accounts.

There are several types of Inherited IRAs, depending on the relationship between the original account holder and the beneficiary. Here are the three primary categories:

1. Spousal Inherited IRA: If a widow or widower inherits an IRA from their spouse, they have the option to treat the account as their own. This means that they can roll over the funds into their own IRA and continue the tax benefits that were previously enjoyed. This flexibility can be beneficial in terms of retirement planning and controlling the distributions.

2. Non-spousal Inherited IRA: Non-spouse beneficiaries, such as children, siblings, or other individuals, have different rules when it comes to Inherited IRAs. These beneficiaries are generally required to begin taking Required Minimum Distributions (RMDs) from the account, based on their own life expectancy, starting in the year following the original account holder’s death. The RMD amounts are determined by the beneficiary’s age and calculated using specific distribution tables provided by the IRS. Failure to take the requisite distributions can result in penalties.

3. Trusteed Inherited IRA: In some cases, an IRA may have been left to a trust. This situation introduces additional complexities, as the rules governing Inherited IRAs for trusts can vary depending on different factors, such as the type of trust and the beneficiaries named. Trusteed Inherited IRAs demand careful consideration and often require the involvement of a knowledgeable financial professional or estate planner to ensure compliance with IRS regulations.

Regardless of the type of Inherited IRA, it is vital to understand the tax implications. Traditional IRAs may be subject to income tax when distributions are made, while Roth IRAs generally provide tax-free distributions for both the original account holder and the beneficiary. The taxation of Inherited IRAs can be intricate, so consulting with a financial advisor or tax professional is advised.

Additionally, it is important to note that rules surrounding Inherited IRAs have changed over the years. In December 2019, the SECURE Act was passed, which impacted the distribution requirements for Inherited IRAs. Under the new law, most non-spouse beneficiaries must fully distribute the inherited IRA within ten years, eliminating the previous option for stretching out distributions over their lifetime. Exceptions to this rule include spouses, disabled individuals, individuals not more than ten years younger than the deceased account holder, and minor children. Staying informed about updates to tax laws is crucial for maximizing the benefits of an Inherited IRA.

In summary, Inherited IRAs can be a valuable asset, but understanding the rules and regulations surrounding them is essential to avoid costly mistakes. Beneficiaries should familiarize themselves with the specific characteristics of the inherited account, seek professional advice, and remain updated on tax law changes to make informed decisions about managing their Inherited IRA.