Do These 5 Things Now
Inheriting an individual retirement account (IRA) can be a significant financial opportunity, but it can also present several financial considerations and potential tax implications. If you’ve recently inherited an IRA, it’s important to understand your options and make informed decisions in line with your overall financial plan and future goals. Take the following steps as soon as possible after inheriting an IRA.
#1 – Consult with your wealth manager.
Inheriting an IRA can have significant financial and tax implications, which is why it’s important to seek professional guidance. Your wealth manager can help you understand how your inherited IRA may impact your financial plan and long-term objectives.
#2 – Consider your tax obligations.
Inheriting an IRA can have significant tax implications. You may be subject to income taxes on any distributions you receive, and the tax treatment of the account can vary depending on the type of IRA, the age of the original owner and your relationship with the owner. It’s important to work with a qualified tax advisor to understand your potential tax liabilities and develop a tax-efficient strategy for managing your inherited IRA.
#3 – Understand your distribution options.
As the beneficiary of an IRA, your distribution options typically depend on the type of IRA you inherited, your relationship with the account holder, whether the account holder had begun taking required minimum distributions (RMDs) from the account, and when the account holder died. Typically, a beneficiary’s distribution options include the following.
- Lump-sum distribution –If you choose a lump-sum distribution of the entire account balance, you may face significant tax liabilities, as any assets withdrawn from a traditional IRA are subject to ordinary income tax rates during the year in which they are distributed.
- Spousal rollover – If you inherited an IRA from your spouse, you likely have the option to roll over the assets into your own IRA. This move allows you to treat the inherited IRA as your own and defer distributions until you reach age 73 (as of 2023).
- Stretch IRA – If you’re a non-spousal beneficiary and the original account holder passed away before December 31, 2019, you may have the option to “stretch” withdrawals from the account over your life expectancy. This move can allow you to take smaller RMDs over a longer period of time, which can help maximize the tax-deferred growth of assets within the account.
- Five-year rule –If the original account holder passed away before beginning RMDs, or if there is no beneficiary named on the account, you may be subject to the five-year rule, which requires you withdraw the entire IRA balance by the end of the fifth year following the account holder’s death.
- Ten-year rule (SECURE Act) – If the IRA account owner died on or after January 1, 2020, the non-spouse beneficiary must withdraw the entire account within 10 years. Currently it’s unclear whether RMDs are required each year under proposed regulations. Your wealth manager will be able to help you determine if and when you need to take withdrawals from your inherited IRA.
#4 – Update beneficiary designations.
It’s important to update the beneficiary designations on your inherited IRA to reflect your own beneficiaries. This helps ensure any remaining IRA assets will be distributed to your designated beneficiaries upon your passing. Regularly review these beneficiary designations to help ensure they continue to align with your overall financial goals and legacy wishes.
#5 – Review and update your estate plan.
Inheriting an IRA may trigger a need to review your own estate plan. If you have your own IRA, you may become aware of changes you wish to make to help ensure your retirement assets are distributed according to your wishes. If you don’t already have an estate plan in place, inheriting an IRA may be a good reminder of the importance of establishing one, as the inheritance process often highlights the need to ensure your assets are distributed according to your wishes while minimizing your heirs’ tax liabilities.
Have you recently inherited an IRA? Could you use some help navigating your options and evaluating your potential tax liabilities? Creative Planning is here for you. Our teams have experience navigating a wide range of tax and financial challenges, always with the goal of helping clients achieve their long-term goals. For more information, schedule a call with a member of our team.