Inheriting an IRA can be both emotionally and financially challenging. As you deal with the grief of losing someone close to you, you might also be facing a complex financial situation.
One of the critical factors that beneficiaries need to understand is the required minimum distributions (RMDs); inheritance rules for IRAs are different from traditional IRA rules, and to avoid penalties, it is essential to know the specific requirements.
1. What is an Inherited IRA?
An Inherited IRA is a retirement account that an individual inherits from someone else after their death. These accounts come with numerous requirements and taxation regulations. The rules regarding Inherited IRAs can vary depending on several factors such as who the original owner of the account was and the relationship between the account beneficiary and owner.Do
2. Do Beneficiaries Need to Take Money Out of Inherited IRA?
In 2020, as a result of the pandemic, the government waived the required minimum distribution (RMD) rules. In February 2022, the IRS issued a proposed regulation suggesting the 10-year deferral rule didn’t mean deferral. Specifically, a beneficiary (other than an Eligible Designated Beneficiary) of a deceased IRA owner must begin withdrawing annual RMDs no later than December 31 of the year after death and liquidate the inherited account by the end of the 10th calendar year. Eligible Designated Beneficiaries (EDBs), who are subject to different requirements, include (i) a spouse or minor child of the deceased account holder, (ii) disabled or chronically ill individuals, and (iii) individuals who are not more than 10 years younger than the deceased account owner. The many nuances of the RMD requirements applicable to EDBs are beyond the scope of this blog post; however, you can click here for a good summary of those requirements.
Essentially, those with inherited IRAs need not take a distribution in 2023. However, their multi-year tax planning might suggest otherwise.
3. Tax Implications of Inherited IRA
Inherited IRAs come with their fair share of taxation regulations and implications. Depending on the ownership status or the beneficiary’s relationship with the original account holder, the tax rules might be different. Beneficiaries should be aware of the tax implications associated with withdrawn money from their Inherited IRA account before they make any decisive actions. Therefore, It is imperative to consult with a financial advisor or tax professional to understand your obligations while managing withdrawals.
4. Estate Planning
If you inherit an Inherited IRA, there are a few estate planning-related considerations to keep in mind. One of them is finding a suitable replacement beneficiary to inherit the account. If you fail to designate a replacement beneficiary, it might be subject to extensive tax consequences. Additionally, inheriting an Inherited IRA might impact your own estate planning goals. Bottom line: we recommended that you speak with an estate planning attorney to discuss your inheritance and your long-term financial objectives.
5. Investment Opportunities
Inherited IRA accounts can provide investment opportunities for beneficiaries. Depending on the account’s setup, beneficiaries can switch the investments to the ones that suit their financial goals and risk tolerance. Moreover, for traditional IRAs, beneficiaries can choose between keeping the assets in the account or withdraw them while managing the associated taxes. The flexibility of investment options might open up numerous opportunities for growth or expansion of wealth.
Inheriting an IRA can be overwhelming, but it doesn’t have to be. Understanding the rules can help you avoid tax penalties and more headaches down the road. Ready to work with a professional who can help you navigate this new territory? We’re here to help. CLICK HERE to make an appointment.
All opinions expressed in this blog post reflect the judgment of Approach Retirement Advisors, LLC (“Approach”) as of the date of publication and are subject to change. The information in this blog post is believed to be factual and up to date; however, we do not guarantee its accuracy. This blog post should not be regarded as a complete analysis of the subjects discussed. This presentation is for educational purposes only and does not constitute personalized investment advice. A professional advisor should be consulted before implementing any of the strategies presented. This blog post should not be construed as an offer to buy or sell or as a solicitation of any offer to buy or sell any securities mentioned herein. Clients and members of Approach may own any securities mentioned herein. Investments are subject to market risks and potential loss of principal invested, and all investment strategies have the potential for profit or loss. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. There can be no assurance that any specific investment will be suitable or profitable for a particular investor’s portfolio. There are no assurances that any portfolio will match or outperform any particular benchmark.