When you inherit an IRA account from a loved one, it can come with both advantages and obligations. Knowing what to do next can help you maximize your inheritance. Also, understanding the applicable fees and taxes associated with it can help you avoid costly surprises further down the line.
Do beneficiaries pay tax when they inherit an IRA?
Yes, in many cases beneficiaries will have to pay tax on the income received from an inherited IRA. Any taxable income withdrawn through distributions must be included on a beneficiary’s Federal and State Income Tax return. Additional taxes may also apply depending on the type of account inherited (e.g. Roth IRA) and the total amount of money withdrawn.
What is the best thing to do when you inherit an IRA?
The best thing to do depends on your own personal financial situation. If you can wait, it is usually better to leave the money in the inherited IRA so that it continues to benefit from tax-deferred growth. You should also consult a qualified financial adviser or tax professional to get specific advice. That’s because there are various strategies they may recommend depending on your various needs and goals.
Do you have to cash in an inherited IRA?
No, you do not have to cash in an inherited IRA. Taking a lump sum can mean sacrificing the potential for long-term growth. So it is usually better to leave the money in the inherited IRA and let it continue to benefit from tax-deferred growth. There are certain exceptions, including if you must begin taking Required Minimum Distributions (RMD), which once you turn 70.5 years old are required for traditional IRAs (but not Roth IRAs).
Can you withdraw all the money from an inherited IRA?
Yes, you can withdraw all the money from an inherited IRA, but we would discourage that. If you make withdrawals before reaching retirement age, you will be subject to income taxes and early withdrawal penalties on the funds. You may want to consider a partial or larger withdrawal if you are facing emergency financial situations. However, you should only do this as a last resort. Generally, it is better to leave the money in the IRA so that it continues growing with tax-deferred returns.
What are the new rules for inherited IRAs?
In recent years, the rules surrounding inherited IRAs have changed substantially. Many of the most important rules involve whether or not you must take required minimum distributions (RMDs). Generally speaking, the longer the time between when you inherit an IRA and your retirement age, the more likely it is that you do not have to take RMDs from the account. Speak with a financial planner to learn more about how these new rules affect you.
We Can Help.
If you are going to inherit an IRA and you have questions, give us a call at 602-443-4888. If we don’t know the answer, we can refer you to a qualified financial advisor.
