Inheriting a parent’s IRA may seem like a good thing, but there can be some unexpected surprises that are not necessarily joyful. There are some important tips that will help IRA beneficiaries avoid unexpected surprises so they will be fully prepared to get the most from their inheritance.
What Is an IRA?
An IRA is an individual retirement account, and it can be passed on to a beneficiary when the account holder dies. It is important beneficiaries understand what they need to do when inheriting an IRA. Being aware of the following tips will help beneficiaries be able to enjoy their inheritance instead of stressing.
5 Tips for IRA Beneficiaries
If you are an IRA beneficiary, knowing what to expect is crucial. You do not want to be saddled with unexpected surprises that cause you to lose more money than necessary. Being aware of these tips will put more money in your pocket.
- If a person inherits a Roth IRA, they can withdraw from the account at any time if the account holder had the account open for at least five years before their death. The five-year rule is essential to remember. If you withdraw from a Roth IRA before five years, you will owe taxes on the earnings.
- If it is a traditional IRA, the withdrawals are likely going to be taxed no matter how long the account has been open or when the withdrawals occur. You will be taxed at the rate of your own income and not the rate of the deceased. One good thing about inheriting a traditional IRA is being able to avoid the 10% early withdrawal penalty.
- Many people are unaware they inherit the RMD (required minimum distributions) of the account. If you received the IRA from your deceased parent, you will be required to take your distribution by December 31 of the fifth year after the account holder dies.
- If you inherit an IRA from a parent, you are not allowed to do any indirect rollovers. You cannot transfer the funds from the beneficiary account to another account without facing taxes and a 10% penalty. Avoiding an indirect rollover is important.
- Another tip IRA beneficiaries should be aware of is they cannot contribute to their inherited account. Once the beneficiary contributes, the account is no longer considered inherited. At that moment, all the inherited money from the IRA becomes taxable, and this can spell big trouble for beneficiaries who are inheriting IRA accounts that are larger in value.
Should You Get Help from a Financial Advisor?
Getting help from a financial advisor can assist beneficiaries in knowing the steps they should take after receiving their inheritance. An advisor can help you avoid taxes and penalties and help you take strategic steps to maximize the inheritance.
Inheriting an IRA is certainly beneficial, but it also has its drawbacks. Special care must be taken to ensure there are no unnecessary taxes owed and penalties are avoided.
Being prepared will help you avoid losing much of your inheritance to taxes and fees. When in doubt, it is wise to get help from a financial advisor to ensure you are making the wisest choices. Getting help from an advisor will allow you to remain in control of your inheritance without the stress that comes with it.