The Inherited IRA: Part Two

Facebooktwittergoogle_pluspinterestlinkedininstagram

Part One can be found here.

There are many situations where beneficiaries inherit IRA monies from someone other than a spouse. This usually comes from parents ,but they can come from others such as brothers, sisters, significant others etc.

Essentially, you have four alternatives. Sadly, most people aren’t aware of their options so they cash out of the IRA and incur a big tax bill.

Note: One big option that is NOT available to inherited IRAs from non spouses is to roll over the funds to your own IRA and treated as if it is your own money. With that in mind, there are your four options.

Option #1

Cash Out the IRA in 5 Years. You, as the non-spouse IRA beneficiary, will be allowed to withdraw all of the funds from the IRA by December 31 of the fifth year following the IRA account owner’s death. If you choose this option, then each withdrawal will be included in your taxable income during the year the funds are withdrawn. You do not have to take the distributions in installments but must withdraw all of the funds at any time prior to the applicable December 31 date.

Option #2

Take Out Required Minimum Distributions Over Your Own Life Expectancy. You, as the non-spouse IRA beneficiary, may be able to take required minimum distributions over your life expectancy, leaving the bulk of the account to continue to grow in a tax-deferred manner. It is often referred to as a ” Stretch IRA.” If you are significantly younger than the IRA account owner and you can choose this option, then you will potentially be able to create a nice little nest egg for yourself. With that said, you will also be able to take out more than your required minimum distribution in any given year if you need to do so.

Sandy’s note: As with option #1, each distribution taken will be included in your taxable income during the year the funds are withdrawn. To choose this option, you must establish a separate inherited IRA account in the deceased account owner’s name for your benefit and take your first required minimum distribution by December 31 of the year following the year of the account owner’s death. For example, the inherited IRA account would be titled “John Doe, IRA (deceased 1/1/13), FBO Sally Doe, beneficiary.” Also, you should be able to name your own primary and secondary beneficiaries if you die and funds still remain in your inherited IRA.

Option #3

Take Out Required Minimum Distributions Over the Oldest Beneficiary’s Life Expectancy. You, as the non-spouse IRA beneficiary, may be able to take required minimum distributions over the life expectancy of the oldest beneficiary of the IRA. It will be the result if the IRA account owner named more than one beneficiary of their IRA and separate inherited IRA accounts are not established for each IRA beneficiary by December 31 of the year following the year of the account owner’s death.

As with options #1 and #2, each distribution taken will be included in your taxable income during the year the funds are withdrawn.

Option #4

Cash Out the IRA Immediately. You, as the non-spouse IRA beneficiary, can withdraw 100% of the IRA account immediately and put the funds into your own pocket. If you choose this option, then 100% of the account will be included in your taxable income during the year of withdrawal. Since choosing this option may very well bump you into a higher income tax bracket, it will be important not to spend all of the funds during the year in which they are withdrawn and instead set aside enough funds to pay the income tax bill.

Otherwise, you could find yourself in trouble with the IRS.

Please share this post and feel free to print out this post. Knowing your options can significantly make your life less taxing.


All content on this site is the property of Taxbot, LLC and/or Sandy Botkin. You may link to any article that you wish, or share via the social media buttons below. However, please do not copy articles or images for use on other sites without express written permission.


Was this post helpful?
Let us know, if you liked this post.
Yes
No
Powered by Devhats
Facebooktwittergoogle_pluspinterestlinkedinmail