Inherited IRA? Here’s what you need to know about making the most of that money.
Tax laws surrounding inheritances are always changing, and it’s impossible to say for certain when the next change will come. If you have an inherited IRA, it’s important to understand the implications—including when it might be time to bring in a financial advisor or tax professional to help you navigate these tricky waters.
First of all, there’s a difference when you inherit an IRA from a spouse. You can choose to treat the inherited IRA as your own or roll the money over into your own account. When completing a rollover, it’s important to make sure the tax treatment of the inherited IRA is the same as your existing IRA. As a spouse, you can also disclaim the money, allowing it to go to the next beneficiary in line.
Avoid an oops: If you decide to treat an inherited IRA as your own, watch out for the possibility of an early withdrawal penalty. Tapping the funds before age 59 1/2 could lead to a 10% additional penalty. Double-check with a tax professional before making a move.
In the past, nonspouse individual beneficiaries could use a life expectancy calculation to figure out how much to take from an inherited IRA. This was a way to reduce the tax burden on the beneficiary. However, since the passage of the SECURE Act, things have changed.
Now, most nonspouse beneficiaries are required to draw down the inherited IRA within 10 years. As a result, some beneficiaries find themselves taking larger chunks out of inherited IRAs—and paying higher taxes.
Exceptions to new inherited IRA rules: Some nonspouse beneficiaries can still use the life expectancy method. These exceptions include those who are chronically ill or disabled, as well as those who are only 10 years younger (or less) than the deceased IRA owner. Another exception is a minor child of the original account owner. However, once the child reaches the age of majority, the clock starts ticking and they must deplete the inherited IRA within 10 years.
Realize that no matter what’s in the will, an inherited IRA goes to the beneficiary listed on the paperwork. On top of that, it’s important to understand whether the deceased IRA owner had already taken a required minimum distribution (RMD). Recently, the age for RMDs was increased to 72 from 70 1/2, so this might change the calculus when you’re reviewing the details.
Don’t forget to double-check tax laws for changes to estate taxes and inheritance taxes. You might be eligible to receive a tax deduction based on estate taxes paid on the account. For example, if an estate tax was levied at the time of the IRA owner’s death, you might be able to take a tax deduction when you make a withdrawal from the inherited IRA, potentially reducing your tax liability.
Avoid an oops: A tax professional can help you figure out what taxes are owed and what tax breaks you might be entitled to. Consider looking for a professional who specializes in these issues to help you figure out how to manage the details.
Receiving an inherited IRA can change the equation on your own retirement planning. You might feel the need to adjust your plans based on an inheritance and other factors. With the help of the TD Ameritrade Retirement Calculator, you can get an idea of how to move forward based on the assets you already have, as well as on what you can expect in the future.
When you receive an inherited IRA, it can change how you withdraw from your tax-advantaged retirement accounts, as well as impact your tax situation. You might adjust when you decide to take Social Security benefits or how you approach your retirement investment portfolio.
A good calculator can help you get a handle on the situation, especially if you follow up by consulting a retirement specialist who might be able to help you create a retirement road map that includes all the factors.
An inherited IRA can make a big difference in your life. But you need to be aware of some of the sticky situations that can arise. If the paperwork isn’t in order, things can get messy. Plus, it’s a good idea to be aware of how changing tax laws might impact how you manage an inherited IRA.
Are you trying to figure out how to pass on your own IRA? Consider estate planning, including a creating a will or living trust. Review your IRA documents to help make the inheritance process as easy as possible for those you leave behind. Planning is the true gift of inheritance.
TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.
How much do you need to save to reach your retirement savings goal? Find out by answering a few questions.
Miranda Marquit is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.