In this episode of Eye On Retirement, Host Rick Everett is joined by Financial Advisor Julie Newton from Market Advisory Group, CPA Pat Dougherty from Market Tax Services, and Health Insurance Advisor Cory Siebert from Market Medicare Advisors, and Estate Planning Attorney Gerald Eidelman to discuss inheriting IRAs from your parents and the fallout that can occur.

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An inherited individual retirement account (IRA) can be a significant financial windfall for a beneficiary. However, along with this inheritance comes tax obligations that can catch many beneficiaries off guard.

When someone inherits an IRA, they often assume that the money is simply theirs to keep. However, this is not necessarily the case. In most cases, the inherited IRA will be subject to taxes on both the federal and state levels.

The tax implications of an inherited IRA can vary depending on several factors, including the type of IRA, the relationship between the beneficiary and the original account holder, and the beneficiary’s age.

If the original account holder had a traditional IRA, the beneficiary will likely be required to pay income taxes on any distributions they receive from the account. This is because traditional IRA contributions are typically made with pre-tax dollars, meaning that they are not taxed until the money is withdrawn.

On the other hand, if the original account holder had a Roth IRA, the beneficiary may not be required to pay taxes on distributions. This is because contributions to Roth IRAs are made with after-tax dollars, meaning that the money is already taxed before it goes into the account.

Another factor that can impact the tax implications of an inherited IRA is the relationship between the beneficiary and the original account holder. If the beneficiary is the spouse of the original account holder, they may be able to roll the inherited IRA into their own IRA without paying taxes. This is known as a spousal rollover.

However, if the beneficiary is not the spouse of the original account holder, they will typically be required to take distribution from the account over a set period of time. This period of time is determined by the life expectancy of the beneficiary and is known as the required minimum distribution (RMD). The beneficiary will be required to pay taxes on any distributions they receive.

Finally, the age of the beneficiary can also impact the tax implications of an inherited IRA. If the beneficiary is younger than the original account holder, they may be able to stretch out the RMD period over a longer period of time, potentially reducing the tax burden.

In conclusion, while an inherited IRA can be a significant financial asset, it is important for beneficiaries to understand the tax implications that come with the inheritance. By understanding the type of IRA, the relationship between the beneficiary and the original account holder, and the beneficiary’s age, beneficiaries can make informed decisions about their inheritance and avoid unexpected tax bills.