Inherited IRA

The options that you have available for the investment, such as an inherited IRA, will often vary based on the relationship between you and the original owner. The rules can be confusing, so you need to make sure you understand what options you have available. For example, the Supreme Court rules that an inherited IRA does not receive any protection under the federal bankruptcy laws. However, the amount of protection you may have through your particular state for inherited IRAs can vary.

What If You Inherited an IRA from Your Spouse?

You have several different options if you received an inherited IRA from your spouse. Let’s look at each of these different options so you can see which one might best apply to you.

The First Option

The first option is for those who inherit their spouse’s IRA directly. In this circumstance, you will be able to transfer the proceeds that you inherited into your own IRA and then use the assets as if they had always been your own. For this to occur though, the registration of both of the IRAs needs to be the same. A traditional IRA would transfer to a traditional IRA and a Roth IRA would transfer to a Roth IRA, for example. One of the primary benefits to this method is that the amount and the MRDs, or minimum required distributions would be based on your age.

The Second Option

The second option is to transfer the IRA or other assets to an inherited IRA. This will reduce the minimum required distributions, as before, and will be calculated by your age. They will recalculate the amount based on the IRS Single Life Expectancy Table. Currently, those who are 70 ½ years old will need to start taking the MRDs by December 31 on the year that follows their spouse’s death. Those who are younger will be able to delay the MRDs until the year that their spouse would have turned 70 ½ years old.

This could be a good option for those who have no worries about creditor protection issues. In addition, it would work for those who are older than their spouse and who had a spouse who passed away before they reached 70 ½ years old. This lets you to delay taking the MRDs. It could also be a good option for those who are under. 59 ½ years old and who need the assets right away. They would not have to deal with the early withdrawal penalty.

The Third Option

A third option would be to roll the inherited IRS over to your own Roth IRA, since you can convert it in your own name. If you choose this option though, you will need to pay taxes on the amount that you convert from the non-Roth IRA to the Roth IRA. When you convert to a Roth IRA, it has the benefit of growing tax free, and you do not have to worry about MRDs in the original owner’s lifetime. This could be a good option for those who expect to have high taxes when they retire and when you are able to pay the taxes with money received through other resources.

The Fourth Option

You also have the ability to disclaim all or part of the assets that you would receive through the inherited IRA. The inheritance that you refuse would then pass on to the next beneficiaries on the list. However, before you choose this option, you would certainly want to speak with your tax advisor and attorney.

The Fifth Option

Those who inherit a workplace savings account rather than an IRA might find that the plan will let you leave the assets in the plan. Of course, the exact rules of these plans vary greatly, so you would need to discuss this possibility with the administrator to see if it is a viable option for you.

Inheriting from Someone Other than Your Spouse

If you inherit an IRA from someone besides a spouse, you will also have several options available to you.

The First Option

You can roll your inherited assets into an Interactive Brokers Inherited IRA account through IncomeClub Management, and you can start to take the MRDs before December 31 the year after the owner’s death. Owners of an IRA can control how the inherited assets are invested and name the beneficiaries for after they pass away.

The Second Option

You could take a cash distribution of the amount inheritance. However, you will first need to have the assets transferred to you through Interactive Brokers Inherited IRA through IncomeClub Management. You will have to face taxes when using this option though. Currently, the laws dictate that you have 20% withholding for the distributions taken from retirement plan accounts.

The Third Option

If you find that you do not need or want the inheritance, you can disclaim it. You could refuse to accept all or part of the assets, and the remaining would go to the next person who is eligible to be a beneficiary. This is similar to the third option when inheriting from a spouse.

The Fourth Option

You may also elect to leave the assets in the plan. Of course, this will depend on the type of inheritance and the plan. This works very similarly to the fourth option when inheriting from your spouse, so you would need to talk with the plan administrator to get the exact details.

As you can see, you have a number of options available with inherited IRAs and other types of inheritances. Because of the vast number of choices available to you, and the confusion they can bring, you will want to make sure you talk with a tax advisor on the best course of action.