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What to Do with an Inherited IRA
What to Do with an Inherited IRA
IRAs are among the largest assets inherited by heirs and beneficiaries. These accounts have been able to grow to such large amounts because income taxes are deferred until the owner begins to take distributions, usually after reaching age 70 ½.
Those who inherit an IRA must be very careful to follow the rules, which are complicated and often confusing. It is possible to keep an account growing tax-deferred for decades, but an innocent error can cause the recipient to lose the tax-deferred advantage and force her to pay tax now on the entire account balance. As a result, it is critical to talk with an expert before making any decision or taking any action, and to understand all available options. Here are some to consider.
Cash Out Option
Anyone who inherits an IRA can cash it out and withdraw the full amount. But because income taxes must be paid on the full amount at one time, this is not usually the best choice.
Spouse Options
A surviving spouse who inherits an IRA from his/her spouse can roll it into a new IRA or merge it with his/her own IRA. In either case, the account can continue to grow tax-deferred and the surviving spouse can continue to make contributions until he/she must start taking required distributions (after age 70 ½).
If it is rolled into a new IRA, the surviving spouse will name new beneficiaries. It is highly advantageous to name someone who is much younger (e.g., children and/or grandchildren) because after the surviving spouse’s death, distributions will be based on the beneficiary’s actual life expectancy. This will allow the account to continue to grow tax-deferred for decades. Under IRS rules, this rollover and stretch out can be done even if the original owner spouse had started taking required minimum distributions before he/she died.
Non-Spouse Options
If the original owner died before beginning to receive required distributions, a non-spouse beneficiary can establish a Beneficiary IRA and start taking annual distributions based on his/her own life expectancy, with the option to take a lump sum at any time. (This is called the “life expectancy option.”) This must be done by the end of the year following the original owner’s death. If the first distribution is not taken by then, all of the IRA must be withdrawn by December 31 of the fifth year after the owner’s death. (This is called the “five year rule.”)
If the original owner died after beginning to receive required distributions, a non-spouse beneficiary must take a distribution equal to the owner’s required minimum distribution for the year he/she died if one had not been taken. For subsequent years, distributions can be based on either the new owner’s life expectancy or the original owner’s remaining life expectancy (whichever is longer).
The original owner’s name must be listed on the title, but the inheriting beneficiary will name new beneficiary(ies). A non-spouse beneficiary cannot roll an inherited IRA into his/her own IRA or make contributions to an inherited IRA, as a spouse can. But when distributions are stretched out over a longer period of time, the tax payments are also stretched out. And by keeping more money in the IRA for as long as possible, the tax-deferred growth can be maximized…which will result in a much larger balance.
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What Would Warren Buffet Do?
Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:
“I could end the deficit in 5 minutes,” he told CNBC. “You just
pass a law that says that anytime there is a deficit of more
than 3% of GDP, all sitting members of Congress are ineligible
for re-election.
The 26th amendment (granting the right to vote for 18 year-olds)
took only 3 months & 8 days to be ratified! Why? Simple!
The people demanded it. That was in 1971 – before computers, e-mail,
cell phones, etc.
Of the 27 amendments to the Constitution, seven (7) took one (1) year
or less to become the law of the land – all because of public pressure.
Warren Buffet is asking each addressee to forward this email to
a minimum of twenty people on their address list; in turn ask
each of those to do likewise.
In three days, most people in The United States of America will
have the message. This is one idea that really should be passed
around.
Congressional Reform Act of 2012
1. No Tenure / No Pension.
A Congressman/woman collects a salary while in office and receives no
pay when they’re out of office.
2. Congress (past, present & future) participates in Social
Security.
All funds in the Congressional retirement fund move to the
Social Security system immediately. All future funds flow into
the Social Security system, and Congress participates with the
American people. It may not be used for any other purpose.
3. Congress can purchase their own retirement plan, just as all
Americans do.
4. Congress will no longer vote themselves a pay raise.
Congressional pay will rise by the lower of CPI or 3%.
5. Congress loses their current health care system and
participates in the same health care system as the American people.
6. Congress must equally abide by all laws they impose on the
American people.
7. All contracts with past and present Congressmen/women are void
effective 12/1/12. The American people did not make this
contract with Congressmen/women.
Congress made all these contracts for themselves. Serving in
Congress is an honor, not a career. The Founding Fathers
envisioned citizen legislators, so ours should serve their
term(s), then go home and back to work.
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