Inherited IRA FAQ
Sep/090
What is an Inherited IRA?
An inherited IRA allows a spouse or non-spouse beneficiary of an IRA to keep his inherited IRA assets tax-deferred until the IRS requires the funds to be distributed. When the account holder dies, a spouse beneficiary may either transfer the assets into an inherited IRA, complete a spousal transfer and treat the assets as his/her own. A non-spouse beneficiary may transfer the assets into an inherited IRA in his/her own name, and begin taking distributions on a distribution schedule based on his life expectancy.
Who can open an Inherited IRA?
Any spouse or non-spouse beneficiary of a Traditional, Rollover, SEP, SIMPLE or Roth IRA can open an Inherited IRA. With an Inherited IRA, the assets can remain tax-deferred – until IRS regulations require that they be withdrawn.
If I am a non-spouse beneficiary, can I just roll the IRA assets I inherit into an existing IRA account?
No, only spouse beneficiaries can treat inherited IRA assets as their own by transferring the assets into an existing or new (non-inherited) IRA.
Can I make additional contributions to my Inherited IRA?
No, contributions to Inherited IRAs are not permitted.
What are the rules for taking distributions from an Inherited IRA?
A beneficiary must first transfer the funds into a beneficiary IRA account. If he/she chooses not to take a lump sum distributions, there are several different options governing the amount and time frame of the distributions depending on several factors such as age, type of IRA, and type of beneficiary.
When can I take money out of my Inherited IRA?
You can make redemptions from an Inherited IRA at any time after it is re-registered into your own name.
Am I required to take money out of my Inherited IRA?
As the owner of an inherited IRA you may be required to either liquidate the account within five years of the December following the original owner’s death OR to choose by September of the year following the original owner’s death to take substantially equal payments over the longer of yours or the original owner’s life expectancy.
What is the deadline for establishing separate “inherited IRAs” so that each beneficiary can use his/her own life expectancy to measure MRDs?
The deadline is Dec. 31 of the year after the year the IRA owner died. The beneficiaries can split up an inherited IRA at a later date; however, a division occurring after the above deadline would not be effective to change the applicable life expectancy for measuring MRDs. All beneficiaries would have to use the oldest beneficiary’s life expectancy to measure MRDs if the “separate accounts” are not established by the end of the year after the year of death.
Inherited IRAs
Aug/090
When our loved ones die and leave behind assets in an IRA account, it is an opportunity to make sure we benefit from continued tax-deferral of investment assets. Tax deferral is one of our favored strategies for building wealth, and we need to preserve tax-deferral whenever we have the opportunity. This article will help guide you through the decision points of an inherited IRA. You’ll need to know:
1. The type of IRA beneficiary – spouse, non-spouse, estate, trust or charity.
2. The type of IRA – Traditional or Roth.
3. The age of the IRA account owner at the time of death.
4. The date the IRA account was opened if a Roth IRA.
Spouse Beneficiary
A spouse inheriting an IRA has the most options, but most likely has the easiest decision.
1. Spousal Transfer – You move the assets into your own IRA (an existing one or a new account set up for the purpose). You get to treat the assets just like your own IRA holdings, and they are subject to all the rules that apply to you as an IRA holder. You get to designate your own beneficiary. Spouses who are not the sole beneficiaries are not allowed to use this option. We would recommend most every sole beneficiary spouse take this option and perform a spousal transfer.
2. Lump Sum Distribution - All the assets are withdrawn, immediately. If the funds are subject to taxes, they must be paid all at once. There is no early withdrawal penalty. We would only recommend this option to a spouse who is significantly far away from reaching 59 and 1/2 years and will need the money immediately.
3. Inherited IRA 5-year option - The assets are transferred into a special IRA account called an Inherited IRA and must be distributed by the end of the fifth year after the death of the original account holder. You get to designate your own beneficiary. This option is not available if your spouse was over age 70 1/2. We don’t see a need for a spouse as sole beneficiary to use this option.
4. Inherited IRA Life Expectancy option – The assets are transferred into an Inherited IRA account (or separate Inherited IRA accounts, if there are multiple beneficiaries) and annual distributions are made based on the life expectancy of those who have inherited the IRA. You get to designate your own beneficiary. We don’t see a need for a spouse as sole beneficiary to use this option.
Non-spouse Beneficiary
A non-spouse inheriting an IRA has fewer options.
1. Lump Sum Distribution - All the assets are withdrawn, immediately. If the funds are subject to taxes, they must be paid all at once. There is no early withdrawal penalty. We would only recommend this option to a person who is significantly far away from reaching 59 and 1/2 years and will need the money immediately to payoff debt or for other major expenses such as paying for college.
2. Inherited IRA 5-year option - The assets are transferred into a special IRA account called an Inherited IRA and must be distributed by the end of the fifth year after the death of the original account holder. You get to designate your own beneficiary.
3. Inherited IRA Life Expectancy option - The assets are transferred into an Inherited IRA account (or separate Inherited IRA accounts, if there are multiple beneficiaries) and annual distributions are made based on the life expectancy of those who have inherited the IRA. You get to designate your own beneficiary. We see this as the most popular option for non-spouse beneficiaries option.
This information is intended to give a quick overview of the issues related to inherited IRAs. We suggest seeking the advice of a tax attorney. Also, please use the IRS publication on this topic.
If you would like to discuss you Inherited IRA situation in more detail, please call me at (813) 282-7870 or send me an email at derek.pilecki@gatorcapital.com.
Derek Pilecki
Gator Capital Management
(813) 282-7870
derek.pilecki@gatorcapital.com
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