This segment of Dollars and Sense tackles the question of inheriting an IRA account. More specifically – if you inherit an IRA account, will you have to pay taxes on it? What options do you have?

The Resource Center’s Bruce Porter outlines your options: either spanning your distributions over your expected lifetime or choosing a five-year distribution. Bruce walks through these options, the pros and cons, and what you might need to take into consideration when choosing an option.

Help your parents plan for their future or plan for your own. Make sure all the designations for your will, your trust, your investment accounts, and your bank accounts are all in order with the help of our financial advisors at The Resource Center.

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Transcript:
Host 1: I am inheriting an IRA account from my deceased father. What options do I have? Or am I stuck with the tax bill? Now, let’s think about this.

Bruce Porter: When you’re a non spouse, and you’re inheriting your dad’s IRA, you got two options, really. You can do what they call a stretch. That’s where you take distributions of that IRA money over your expected lifetime. And so there’s a calculation for that. And that’s a way for you to leave the IRA in deferral and let it continue to compound grow, while you take money out, because they force you to take money out with that RMD calculation. But you can stretch that IRA into decades of income. So I don’t know how old this young man is. But let’s say you’re 60 years old, and your father passed, and now you’ve got his big IRA account. Well, over your lifetime, you can stretch that out into income. Makes a lot of sense to do that.

Now, if that is a Roth IRA account, the benefits will move forward to you as well. So you’ll have tax free distributions of money over that period of time. Now, there’s a couple things. There’s a lot of red tape. There’s a lot of rules, in order to comply with all that. But once you get all that down, the benefits are really huge. If you mess up the beneficiary designation on your IRA, then the IRA will pay to the estate. And they will force you to take a distribution over the next option, which is a five year distribution. Well, the problem with that is, they’re gonna force that out over five years. And if it’s a half a million dollar IRA, you’re gonna have a substantial tax liability – monstrous – on that inherited IRA. So if you can take a stretch option, that’s usually a better option.

The one thing you do want to do though is make sure… we talked about planning your parents, retirement planning your parents old age, things like that. Well, when you go to the insurance people or the investment people or the CPA or the attorney, make sure all the designations for your will, your trust, your investment accounts, your bank accounts, make sure everything is in order. Because one little slip up on an IRA account can cause you huge tax liabilities, and forced the distribution of it, where otherwise you can spread it out.

Now, there’s another thing you got to remember, if your father was taking RMD payments, because he was above age 70 and a half. And let’s say we don’t know the dates, but let’s say he passed away on December the first. All right. If he has not taken an RMD for that year, and really you don’t even find out about how you’re going to logistically receive the money until January or February. If his RMD payment was $5,000 and no one took it because he died, you’re going to have a $2500 tax penalty. So that means that if no one took an RMD the year you receive it, you have to take it that year.

Now, you don’t have to start your distributions until the year following the decedent’s death. So if your dad died December 20, he had already taken his RMD. No big deal. By December 31 of the following year is when you have to start taking your required distributions.

Host 2: So Bruce, it seems like there’s a lot of like details. Like you said you have to do right. There’s a lot of details. Is that something that people would need to then call you to make sure they’ve got it covered?

Bruce Porter: I always say – ask an expert. If you’re planning your parents accounts and helping them organize, always check your beneficiary designations. As long as you do that, then you’ll know how things are going to pay out when they are gone.

Host 1: Well, if you’ve got a question for Bruce, you can email him at bporter@kolr10.com, and he’ll answer your question on the show.

Investing involves risk, including the potential loss of principal. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC, (AEWM). AEWM and The Resource Center are not affiliated companies.”…(read more)

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