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Did you recently inherit an IRA from a loved one? An IRA is an effective savings tool because it offers tax-deferred growth, which means earnings inside the account aren’t taxed until a distribution is made. In a Roth IRA, earnings may never be taxed.
That tax deferral can help an IRA owner accumulate assets more quickly than in a taxable account. As a beneficiary on the IRA, however, you may have important tax considerations to think about before you file your beneficiary claim.
Many beneficiaries take their benefit as a lump sum. It’s understandable why that’s a tempting option. Before you take your benefit as a check, though, you may want to think about all your options. Below are a few IRA beneficiary options. Consult with your financial professional to see which one best aligns with your needs and goals.
Roll it into your own IRA.
This option is available only for spousal beneficiaries. If you’re the beneficiary on your spouse’s IRA, you have the option to roll the death benefit into your own IRA. You avoid taxes on the distribution, and the inherited amount becomes a part of your IRA as if it were your own contribution.
This is a popular and helpful option because it’s simple. You can keep all your assets in one account, which may make it easier to manage your income and your investment strategy. Plus, all the rules regarding distributions are based on your age rather than your spouse’s, so it may be easier to stay within guidelines for required minimum distributions.
Create an inherited IRA.
If you’re an IRA beneficiary but aren’t the spouse of the individual who passed away, you may be tempted to take the benefit as a lump-sum payout. However, doing so could create a sizable tax liability, especially if the account is a traditional IRA. Distributions from traditional IRAs are taxable as income. The payout could push you into a higher tax bracket.
An alternative is to create an inherited IRA. The account is titled in your name as beneficiary of the loved one who passed away. You get to keep the funds in the account but are required to take minimum distributions each year. This allows you to increase the assets on a tax-deferred basis while spreading out the tax liability over many years. If you don’t need the money right away, this could be a wise option.
Take the death benefit as a cash distribution.
Finally, you always have the option to take the benefit as a lump sum. Again, if the account is a traditional IRA, you’ll likely face income taxes on the distributed amount. Those taxes could be significant, so it’s important to consult with a financial professional.
If the account is a Roth IRA, the distribution is tax-free. However, you still may want to consult with a professional, so you can plan on how to use the windfall to best meet your financial goals.
Ready to develop a strategy for your inherited IRA? Let’s talk about it. Contact us today at Judy Financial Group. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
18279 - 2018/11/28
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