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ASK CARRIE- You've Inherited an IRA. Now What? PDF Print E-mail
Written by BYCARRIE SCHWAB POMERANTZ, Creators Syndicate   
Wednesday, 03 November 2010 21:52

Receiving an inheritance brings up a lot of emotion. Whether the assets involved are large or small, life-changing or not, you're gaining something at the loss of a loved one. Given this, it's important to take the time to think clearly about your choices.

The good news is that recipients of inherited IRAs do have choices on how tomanage the assets. The not-so-good news is that those choices are governed by a variety of rules depending primarily on whether the beneficiary is a spouse. But it also depends on the type of IRA and the age at which the original IRA account holder died.

The details are complicated and beyond the scope of this column, but I can give you an overview of the basics for spouse and nonspouse beneficiaries. That way, you'll have a framework from which to discuss your own situation in greater depthwith your tax or financial adviser. You may also want to consult IRS Publication 590, Individual Retirement Arrangements (IRAs).


More often than not a spouse is the primary beneficiary of an IRA. And as a spouse beneficiary, you have a lot of flexibility in managing this inheritance.Your decision really comes down to when you want to take the money, but tax and age considerations may also come into play. Here are your basic choices:

• Take the assets as a lump sum. If you need the money right away, this is probably the simplest. All assets are distributed to you and there's no 10 percent early withdrawal penalty. But you will pay income taxes on the distribution, so thatfs an important consideration. Also, the lump sum distribution could bump you into a higher tax bracket.

• Open an inherited IRA. This transfers the assets into an IRA held in the name of the original account holder for your benefit. You'fll maintain the assets' tax advantaged growth potential and there are no withdrawal penalties. You will pay income tax on the withdrawals if the account is a traditional IRA, but not if it's a Roth IRA that the original account holder had open for at least five years.

Also, you might need to take a Required Minimum Distribution (RMD) annually, and this is where it can get complicated. While RMD calculations will generally be based on your own age, not that of the original account holder, the date that you must begin taking RMDs depends on whether the deceased was under or over 70 1.2 and whether or not he or she had begun to take an RMD. Best to talk to a tax adviser about this.

• Transfer the assets to your own IRA. This option is only available to spouse beneficiaries and is another easy way to keep the assets growing tax-deferred. One caveat:While you can access the assets at any time, once you make the transfer, the normal distribution rules apply (RMDs are based on your age). Withdrawals before you reach age 59 1.2 are subject to a 10 percent early-withdrawal penalty.


As a non-spouse beneficiary, you basically have the first two choices: a lump-sum distribution or an Inherited IRA. As a nonspouse beneficiary, if you choose to open an Inherited IRA, it's important tomake sure the assets are directly rolled into your Inherited IRA and not issued to you personally.Otherwise the distribution will be considered part of your gross income and will be taxable.

Also, if there aremultiple beneficiaries, each beneficiary should open their own Inherited IRA. If not, RMD calculations will be based on the life expectancy of the oldest beneficiary.


There is another option. As a spouse or non-spouse beneficiary, you candisclaimall or part of your inheritance, passing it on to the next eligible beneficiary. This can be an effective tax- or estate-planning strategy in certain circumstances.

As I said, these are just the basic rules. I encourage you to talk to your attorney or financial adviser to determine the best course of action for you.

Carrie Schwab-Pomerantz, can e-mail Carrie at askcarrie@


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