Have you inherited an IRA, or may inherit one in the future? If yes, then it is not as simple as you may think. But, like most things in life, it is best to be prepared than (unpleasantly) surprised. Read on.
Retirement accounts can be one of the trickiest assets one can inherit. Wrong moves are often irreversible and costly, especially when it comes to ponying up income taxes. Fortunately, a recent article in Forbes offers seven steps you ought to consider as an IRA beneficiary. Similarly, you may want to pass this information along to the beneficiaries of your own IRA. Here is the gist of the Forbes article, retooled a tad:
- Find out if a required minimum distribution (RMD) needs to be taken for the year you receive it. If the account is tax-deferred (like a traditional IRA or 401k) and the owner was at least 70½, then you need to contact the account custodian to be sure it has been taken and to take it yourself if needed. Big excise tax penalities await those who fail this test.
- If there are multiple beneficiaries, then consider splitting the account into separate IRAs for each, thus avoiding investment disputes and allowing the younger beneficiaries greater leverage in stretching out RMD's.
- If there are secondary beneficiaries consider "disclaiming" the IRA, especially if it's not something that you need or may even become a tax burden. Once disclaim, the IRA then passes to the secondary beneficiaries.
- You need to figure out when to begin taking RMD's. Unless your are the spouse of the deceased, this means re-titling the account to reflect that it is yours by way of a beneficiary inheritance. If you are the spouse this either means waiting until your spouse would have begun taking them (when they would have turned 70½) or rolling it into your own IRA and taking it as your own.
- Determine whether you want to keep the account in the original institution. Some institutions don't permit you to take distributions across your own lifetime and you may just want to shift it over to a more agreeable institution. In that case, it is often best to open an account at another institution and ask them to retrieve the account (rather than effecting the transfer yourself, as that can be risky!).
- Be sure to name your own beneficiaries and secondary beneficiaries, ensuring the protection of the account and giving flexibility to your heirs.
Reference: Forbes (August 23, 2011) "7 Steps to Take When Inheriting a Retirement Account"