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Asked & Answered: Handling an Inherited IRA

March, 29 2012

 

Bradley from Biloxi, MS:

 

I recently inherited an IRA, but I’m under 70 ½.  Do I still need to take distributions?

 

Friedenthal Financial:

 

It’s a good question that contains some potential tax consequences.  We remind you that we are not accountants and don’t provide tax advice.  It is always advisable to seek professional tax counsel for your unique situation.  That said, here are a few things that you should consider. 

 

The first distinction that needs to be made is if the decedent was your spouse.  If so, you can keep the IRA in your spouse’s name with yourself as the beneficiary.  As such, you would only be required to take distributions according to your spouse’s age, as if they were still alive (according to the IRS single life expectance table).  As an alternative, you may roll your spouse’s IRA into your own IRA (meaning you are the named owner, not the beneficiary) and would be required to make withdrawals according to your own age.  There is no deadline for doing a spousal rollover.  For most people, who wish to keep as much tax deferred as possible, selecting to rollover is preferable if you are younger than your spouse and don’t need the funds before you turn 59 ½.  One benefit to leaving it in your spouse’s name would be if you NEEDED to withdraw money prior to age 59 ½, you would not be subject to the 10% penalty as you would for early withdrawal from your own IRA.

 

If you inherited an IRA from someone OTHER than your spouse, your required minimum distribution (RMD) is based on YOUR age, and begins the year following the year of death of the original account owner.  Even if you are below 59 ½, there is no penalty for withdrawal, since you have a required distribution.  In fact, there are substantial penalties if you do NOT withdraw your RMD each year (up to 50% of the RMD not withdrawn!).  If there were multiple beneficiaries, it is generally recommended that each roll their portion into their own respective Inherited IRA account and would have RMD based on their age.  If the account is not separated, RMD is calculated based on the ELDEST beneficiary’s age.

 

There is also a “5 year rule” pertaining to Inherited IRAs.  Meaning, you are able to withdraw all funds (and be taxed) by the end of the 5th year following the decedent’s death, without penalty.  So, if you have not been taking your RMD for the first few years, you can avoid penalties by doing a complete withdrawal under the 5 year rule.  Occasionally the IRS has an amnesty year, which requires no RMD.  This also pushes the 5 year rule to effectively a 6th year.

 

If the decedent was required to take a distribution in the year of death, but had not, you are required to take THAT same distribution, for that year ONLY.

 

This link takes you to the IRS single life expectancy table, used to calculate RMD

 

We hope that helps and provides fodder for discussion. Please let us know if we can be of further service!

 

The Friedenthal Financial Team

856-210-6494 (Office)

856-210-1565 (Facsimile)

info@friedenthalfinancial.com

www.friedenthalfinancial.com

 

Please send us your questions!! If we don’t know the answers, we’ll find someone who does!

 

If you know someone who would like to discuss their investment needs with us, we certainly appreciate the introduction.

 

This blog is only intended to provide answers to questions of general interest we receive on the topics of investments, finance, capital markets, and economics and to serve as a historical repository for our e-mailed Asked & Answered column. We are not rendering or offering to render personalized investment advice or financial planning advice through this blog or any of its attached links. Friedenthal Financial will render investment advice to potential clients only after: (i) we have delivered a disclosure statement to the potential client as required under applicable securities laws, and (ii) the potential client has executed and delivered Friedenthal Financial’s investment advisory contract to us. We will provide investment advisory services to clients only in states in which Friedenthal Financial is registered as an investment adviser or is exempt from registration.