As a Personal Family Lawyer®, I am often asked to help people who inherit a retirement account. The action you need to take with an inherited IRA depends upon your unique situation; the IRS has rules for each and recently announced that they will be cracking down on taxpayers who make mistakes with inherited IRAs. Here are some inherited IRA scenarios and options for each:
If the account you inherit was a 401(k) or traditional IRA and the decedent was at least 70 ½ years old: Contact the financial institution that holds the account to determine if the decedent had already taken the required minimum distribution for the year they died. If they did not, you will need to do so.
If you are the spouse of the deceased account owner: You can roll an inherited IRA into your own IRA to postpone taking distributions until you turn 70 ½. If you take distributions before you turn 59 ½, you may be subject to early withdrawal penalties. You can also leave it where it is and postpone taking the required minimum distribution until your deceased spouse would have turned 70 ½.
If you are not the spouse: You must first re-title the account to name you as the beneficiary. You will then be required to start taking required minimum distributions, which can be stretched out over your lifetime, beginning by Dec. 31 of the year following the death of the account owner.
If there are secondary beneficiaries: You have the option of disclaiming the inherited account, which will allow it to pass directly to the secondary beneficiaries. This is usually done to avoid creditors or to minimize income or estate taxes.
If there are multiple beneficiaries: You are allowed to split the account into separate IRAs for each beneficiary.
To your family’s health, wealth and happiness!
David Feakes
P.S. Want to get started on the most important planning you’ll ever do for your family? Give our office a call at (978) 263-6900 to get started. You’ll be so glad you did.
David Feakes is the owner of The Parents Estate Planning Law Firm, PC – a law firm for families in the Acton, Massachusetts area. David helps parents protect the people they love the most. If you would like to receive David’s exclusive, free report, “Six Major Mistakes To Avoid When Choosing An Estate Planning Attorney,” you can get it right here.
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