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What to do with an inherited IRA? The question might seem daunting at first, especially if you’re unfamiliar with individual retirement accounts (IRAs) and their intricacies. However, with some basic knowledge and careful consideration, managing an inherited IRA can become a smooth and beneficial process.

When you inherit an IRA, you have several options to choose from, and your decision should align with your financial goals and circumstances. Here are some common choices to help you make an informed decision:

1. Stretch the IRA: If you’re a non-spouse beneficiary, you have the opportunity to stretch the IRA over your lifetime. This option allows you to take required minimum distributions (RMDs) based on your life expectancy, minimizing the tax impact on the distributions. The remaining funds continue to grow tax-deferred, ensuring long-term financial gains.

2. Take a lump-sum distribution: While tempting, taking a lump-sum distribution can result in a significant tax burden. With this option, the entire amount of the inherited IRA is distributed to you as taxable income, potentially pushing you into a higher tax bracket. This approach may be suitable if you need immediate access to the funds or have a substantial tax strategy in place.

3. Utilize the 5-year rule: If you can’t stretch the IRA over your lifetime or don’t want to, non-spouse beneficiaries have the option to take distributions within five years of the original account holder’s passing. While this approach gives you more flexibility than a lump-sum distribution, it may still result in a higher taxable income.

4. Convert the inherited IRA into an inherited Roth IRA: If the original IRA was a traditional one, you have the opportunity to convert it into an inherited Roth IRA. By doing so, you will pay taxes on the amount converted (since Roth IRAs are funded with after-tax dollars), but future qualified distributions will be tax-free. This option can be highly advantageous if you expect to be in a higher tax bracket in the future or want to leave a tax-free legacy for your own beneficiaries.

5. Disclaim the IRA: If you don’t need the funds or want to redirect them to another family member, you can choose to disclaim the inherited IRA. By doing so, the assets will pass to the next designated beneficiary, potentially allowing them to benefit from a longer distribution period or other tax advantages.

It’s crucial to consult a financial advisor or tax professional when deciding what to do with an inherited IRA. They can provide personalized advice based on your specific circumstances, ensuring you make the most suitable choice for your financial well-being.

Remember that the rules and regulations surrounding inherited IRAs can be complex and subject to change. Staying informed about current laws and seeking professional guidance will help you navigate the process with confidence and efficiency.