7 Reasons to Consider a Roth IRA for Retirement

Though the thought of reducing taxes with a Traditional IRA is alluring, some people may benefit by contributing to a Roth IRA that offers no immediate tax break, but has other tax advantages.

Roth IRAs offer tax-free growth potential and tax-free income during retirement, making them a good choice for long-term planning. Read more

Inherited IRA Rules for a Non-Spouse

IRAs are not only an important way to enjoy retirement and be financially secure, but can also be a valuable resource to take care of family and friends in the event of your death.

Can Non-Spouses Inherit IRA’s?

IRAs can list beneficiaries other than spouses on the policies. This can include children, grandchildren, siblings, distant relatives, and even friends.

When an IRA is inherited by a beneficiary other than the spouse, there are more options available to receive payments and ways to avoid paying hefty taxes. One of the primary benefits of a non-spouse beneficiary is that money can be taken from the IRA before the age of 59 1/2 years of age without incurring the 10% penalty.

What are the Payment Options for a Non-Spouse Inherited IRA?

Taking payments on an inherited IRA can vary depending on your current financial situation and how much you are willing and able to pay in taxes on the amount distributed each year. Your options include:

Taking Minimum Distributions Throughout Your Lifetime

This type of payment is referred to as a “stretch IRA” and can be a great option for beneficiaries who are younger than the previous owner of the IRA account. In this type of payout, the recipient will take the required minimum distributions while keeping the bulk of the money in the IRA account.

With a young beneficiary, this can allow the original account to continue to grow until they reach retirement age.

Liquidating the Policy in Five Years

You have the option to remove all of the money in the account over the five-year period ending at the end of the tax year five years after the inherited date. While there is no requirement to how much is taken out each year over the five years, the amount that you do remove will be counted on that year’s tax return as income.

Cash Out the Account Right Away

You can liquidate the policy immediately upon inheritance, but will be required to claim it all as income for the year it is removed.

When choosing this option, it is important to set aside enough money to cover the next year’s tax bill. The size of the payment may bump you into the next tax bracket and lead to a significant amount if not accounted for.

Takeout Minimum Distribution Over the Life Expectancy of the Eldest Listed Beneficiary

If there are multiple beneficiaries on the policy, you may be allowed to take the minimum distribution amount over the life expectancy of the oldest named beneficiary on the policy. As with all the other options, the amount withdrawn will need to be included in that year’s income.

Tips for Handling a Non-Spouse Inherited IRA

When choosing your payment option and managing your inherited IRA, there are a few tips that are important to follow to ensure that you do not end up with unexpected complications or problems when liquidating the policy.

  • There is no 60-day rollover on an inherited IRA – When you have an IRA policy, you are often able to withdraw money and pay it back within 60 days to avoid paying taxes on the amount withdrawn. However, this option is not available when the IRA is inherited. Any withdrawals will need to be reported on your income.
  • You cannot combine an inherited IRA with other IRA assets – While you can combine multiple IRA policies inherited from the same individual at the same time, you can not combine an inherited IRA policy with one inherited from another person.
  • You need to keep your beneficiary information updated – It is important to note that an IRA beneficiary form will override a written will. Make sure that you keep your IRA beneficiary information updated on a regular basis to prevent any complications during the transfer.

Since rules for distributions as well as tax issues with an inherited IRA can be hard to navigate, it is important to seek financial advice to ensure that you are choosing the option that will best help you now and in the future.

If you want more information about inherited IRAs or have received one and need to know the next steps, contact the financial experts at BP Financial today.