As we discussed previously, waiting on an inheritance is probably not a viable retirement plan. However, that does not mean that you should not be prepared in the event that you do inherit a portion of money from your loved ones. It is estimated that millennials will inherit a collective $30 trillion as heirs over the next 30 to 40 years. How do you receive the money you inherit? What are you allowed to do with it? What should you do with it? These are all valid questions for someone dealing with an inherited IRA.
Inherited IRAs could end up being a significant part of your retirement plan one day, so handling them is something you should prepare for. What you do with an inherited IRA will likely depend on your relationship to the original account owner. Here are two scenarios to consider.
Inheriting as a non-spouse. If you inherit assets, and you are not the spouse of the original owner of the assets, then you have the option of transferring the assets into an inherited IRA. Like a traditional IRA, inherited IRAs are subject to required minimum distributions, the amount of which is calculated based on the heir’s life expectancy. Unlike a traditional IRA, RMDs on an inherited IRA for a non-spouse heir must begin no later than Dec. 31 of the year following the account owner’s death. These distributions will be taxed based on your regular income tax rate. Another thing to note is that RMDs will come into play even in the event that you inherit a Roth IRA, which is normally not subject to RMDs.
There is another option, however, that would allow you to avoid RMDs altogether, and that involves taking an immediate lump sum distribution. Be careful—the income on the lump sum will be taxed at your marginal tax rate, but the 10 percent early withdrawal penalty would be waived.
Inheriting as a spouse. A spouse will have the same options—to transfer the money into an inherited IRA or take a lump sum. However, a spouse can also opt to treat the IRA as his or her own, or keep the IRA in the deceased spouse’s name.
- If you opt to treat the IRA as your own: RMD rules still apply; however, you do not have to start taking distributions until age 70.5.
- If you opt to keep the IRA in your spouse’s name: This could benefit you if your spouse is younger being that RMDs are calculated based on life expectancy.
- If you opt to take a lump sum: If might make sense if you expect to be in a higher tax bracket in the future, because then you can pay taxes on the distribution at a lower rate.
- If you opt to transfer into an inherited IRA: You can distribute the entire account balance by Dec. 31 of the fifth year after the year the account holder died.
- If contributions are from a traditional IRA: Regular income tax applies, but you will not endure the 10 percent early withdrawal penalty.
- If the contributions are from a Roth IRA: If the account holder was at least 59.5 and the Roth IRA had been established for at least five years, then all distributions are tax free. If either of those were not the case, original contributions would be tax free, but earnings would be taxed.
No matter what you choose to do with an inherited IRA, remember that you get to make the decision as to how the assets are invested. When inheriting an IRA, you should take time to reevaluate the way it is invested, because your investment wants and needs may not necessarily match those of the original account owner.
One way you can invest an inherited IRA is in an account in which your money is protected from market loss while simultaneously growing at a reasonable rate of return. At Ty J. Young Inc., we can show you how it’s done! Give us a call today at 877-912-1919 to get started.