The inheritance of a loved one’s retirement account is quite common. As an estate planning lawyer, my experience has taught me some lessons that can help anyone wondering what step to take next. Much depends on your unique situation–the tax code has a diverse set of rules and, though they aren’t making it any easier, the IRS recently announced a harder line against taxpayers who make mistakes with inherited IRAs.
Below are some of the more common scenarios involving inherited IRAs. Though not thorough, this may help you to get an idea of the general categories–if you’re not certain about how to handle and IRA account you inherited, don’t hesitate to give me a call!
If the account you inherit was a 401(k) or traditional IRA and the decedent was at least 70 ½ years old: You need to know if the account owner had already taken the required minimum distribution for the year they passed. It is important that the minimum be taken, so contact their bank or other financial institution as soon as possible.
If you are the spouse of the deceased account owner: Until you reach 70 ½ years of age, you have the option to roll an inherited IRA into your own, effectively postponing the distributions. Remember, any distribution you take before you turn 59 ½ may be subject to early withdrawal fees. Alternately, leave the account where it’s at and wait on taking the required minimum distribution until your spouse would have turned 70 ½.
If you are not the spouse: The account must first be retitled, naming you as the beneficiary. You must start taking minimum distributions beginning by December 31 of the year thereafter, lasting until the account’s funds are extinguished or you die.
If there are secondary beneficiaries: If you need to avoid creditors or minimize your income or estate taxes, you have at least one alternative: disclaiming the inherited account, afterwhich it will pass directly to the secondary beneficiaries.
If there are multiple beneficiaries: An IRA can be split among beneficiaries without much fuss.
If you’d like to learn more about how to treat inherited IRAs or have other estate planning questions, call our office today at (612) 206-3701 or fill out our contact form to schedule a time for us to sit down and talk.
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