Inherited IRA Planning Decisions Part One

Blaine Bowers |

What are my options if I inherit an IRA or benefit from an employer-sponsored plan?

If you don't want the money, you can always disclaim (refuse to accept) inherited IRA or funds from an employer-sponsored plan. But if you're like most people, you’ll want the money.

Your first thought may be to take a lump-sum distribution, but that's usually not the best idea.

Although a lump sum provides you with cash to meet expenses or invest elsewhere, because it removes funds from a tax-deferred environment it can also result in a huge income tax bill (and in most cases, that huge income tax bill will be due all in one year).

Fortunately, you probably have other alternatives to a huge income tax bill.

If you are the designated beneficiary (i.e., you are named as beneficiary in the IRA or plan documents), you can take post-death distributions over your remaining life expectancy, spreading out distributions over a number of years.

A life expectancy calculation will give you the minimum amount you must withdraw from the IRA or plan each year to break up the income tax bill (yet, of course you can always withdraw more than required in any year).

Yearly distributions from the IRA or plan must begin by December 31 of the year following the year of the owner's or participant's death you have inherited the money from.

If there are other designated beneficiaries and separate accounts have not been set up, the oldest beneficiary must be used for the life expectancy calculation. (Note: An employer-sponsored retirement plan can specify the distribution method that beneficiaries must use.)

You may have other options as well and I will cover some of those other options in my next post.

The rules governing inherited IRAs and employer-sponsored plan accounts are complex.  Consult a tax advisor for more information. Neither Blaine Bowers nor the Strategic Financial Alliance provide tax or legal advice.