Before making plans for your inheritance, there are important decisions that need to be made to avoid penalties and unnecessary taxes. Beneficiaries need to understand the new rules and regulations that were passed as part of the SECURE Act in December 2019.
Inheriting a traditional IRA from a spouse
If a traditional IRA is inherited from a spouse there are generally three options and choices need to be made within a 60-day limit in order to avoid a taxable distribution:
- The surviving spouse can treat it as his or her own IRA and simply designate herself or himself as the account owner.
- Roll it over into a separate traditional IRA, or to the extent it is taxable, into another qualified plan.
- The surviving spouse can treat herself or himself as the beneficiary.
Each of these actions creates additional choices that need to be made.
Inheriting a traditional IRA from someone other than your spouse
The rules for inheriting an IRA from a parent, another relative, or friend are more complicated and you need to take action to avoid potentially costly IRS penalties. The beneficiary can make a trustee-to-trustee transfer as long as the account is maintained in the name of the deceased IRA owner and for the benefit of the beneficiary. New contributions to this account are not permitted and there are distribution rules that need to be followed. Required minimum distribution (RMD) rules can be found at this IRS website. Beneficiaries need to understand the RMD rules to maximize the inheritance and avoid unnecessary taxes and penalties which can be as much as 50% of an undistributed amount.
The manner in which you navigate your inherited IRA can make a huge difference in the amount of taxes you pay and how long the money lasts. The IRS has a comprehensive distribution manual the provides detailed answers to distribution questions or you can choose to hire a fee-only fiduciary financial adviser that is required to act in your best interest to assist you.