If you are the beneficiary of an inherited IRA, you will have a very important decision to make. You will need to decide what you are going to do with it. Many people find inherited IRA’s extremely complicated to understand, especially when it comes to taxes. This is not surprising as the tax rules are very complex. IRS rules for making the most out of your inherited IRA run to about 45 pages long. You may choose to receive the total balance straight away in a total distribution. In most cases, it is more beneficial to leave the IRA well alone for as long as you can. It will then defer taxation and maintain the period of tax-deferred growth.
What Is an Inherited IRA?
An inherited IRA enables the beneficiary to keep their own IRA assets deferred until the funds in the inherited IRA are required to be distributed by the IRS. A spouse beneficiary can either transfer the assets into an inherited IRA or alternatively complete a spousal transfer treating the assets as their own when the account holder dies. When the beneficiary is a non-spouse they will be able transfer the assets into an inherited IRA using their own name. In most cases, they will be able to continue distributions on the same schedule, which applied to the original account holder before their death.
You are only allowed to open an inherited IRA if you are the beneficiary of a traditional, rollover, SIMPLE, SEP or Roth IRA. All assets can defer tax until the IRS requires their withdrawal. If you are a non-spouse beneficiary, you will not be able to roll the IRA assets that are inherited into an already existing IRA account. Only spouse beneficiaries are allowed to treat them as their own assets by transferring to a non-inherited IRA. You will not be permitted to make contributions to an inherited IRA.
Rules for Taking Distributions
A beneficiary will have to transfer the assets into a beneficiary IRA account before they are able to take any distributions. Beneficiaries have the option of receiving lump sum distributions. If a beneficiary chooses against a lump sum then several options will govern the amount and period of the distributions. This will be decided on several different factors, which include age, type of IRA and the type of beneficiary. All distributions are taxed in the same way as the original. If you hold a traditional BDA account it will taxed as ordinary income while if you hold a ROTH BDA account you will have no federal taxes.
If you are able to handle an inherited traditional individual retirement account in the correct manner, you could be in for a very tidy some of money. It is very important that you pursue the guidance of a tax advisor because if you fail to handle your inherited IRA correctly and you follow the IRS regulations to the letter it is possible that you could find yourself paying very significant penalties and taxes. You are provided with a unique opportunity that allows you to continue tax-deferred investing. That tax advantage can allow the value of your inheritance to grow considerably over time.
