Beware of what you CAN and CAN’T do with an Inherited IRA. Greg Hammond, CFP®, CPA shares the 10 things you need to be aware of to prevent you from potentially paying more income taxes than you need to. Get the full details in our video class titled “Inherited IRA: What Do You Do?”

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Inheriting an individual retirement account (IRA) can be a significant financial benefit, but it also comes with certain rules and restrictions. When it comes to managing an inherited IRA, there are some things you can do and some things you can’t do. Understanding these guidelines is crucial to making the most of this financial windfall. Here are 10 things you can and can’t do with an inherited IRA.

1. You can withdraw funds from an inherited IRA, but you can’t wait too long to do so. The IRS requires beneficiaries to begin taking distributions from the account by December 31 of the year following the original owner’s death.

2. You can withdraw the entire balance of the inherited IRA in a lump sum, but you may face hefty tax consequences. It’s generally more advantageous to take distributions over time to spread out the tax burden.

3. You can transfer the inherited IRA to a new custodian or a new retirement account, as long as it is done properly. Direct trustee-to-trustee transfers are the recommended method to avoid any tax implications.

4. You can convert a traditional inherited IRA to a Roth IRA, but you will owe taxes on the converted amount. However, this can be a strategic move for beneficiaries in lower tax brackets.

5. You can’t contribute additional funds to an inherited IRA. Unlike with your own IRA, you cannot make contributions to an inherited account.

6. You can use the “stretch” provision to take required minimum distributions over your lifetime, reducing the tax impact and allowing the account to continue growing tax-deferred.

7. You can’t name new beneficiaries for an inherited IRA. The original beneficiary designated by the deceased owner must continue to take distributions based on their own life expectancy.

8. You can take withdrawals from an inherited IRA for any reason, without penalty, even if you are not yet 59 ½ years old. However, you will owe income tax on these withdrawals.

9. You can’t roll an inherited IRA into your own retirement account. Inheriting an IRA requires it to remain a separate, inherited account.

10. You can use the assets from an inherited IRA to pay for certain qualified expenses, such as higher education or a first-time home purchase, without incurring the usual early withdrawal penalties.

Inheriting an IRA comes with important considerations and responsibilities. It’s essential to familiarize yourself with the rules and options for managing an inherited IRA to make informed decisions and maximize the financial benefits. Seeking guidance from a financial advisor or tax professional can help you navigate the complexities of managing an inherited IRA and make the most of this valuable asset.