So you just inherited an IRA or assets from a qualified retirement plan from someone other than your spouse … now what?
First, it’s common for parents to want to name their children as beneficiaries to their retirement assets. Your beneficiary can be anyone; they don’t even have to be related to you (but if you are married, you may need your spouse’s consent to name someone else as the primary beneficiary). Also, these retirement assets are tax deferred, meaning they are taxed at the time you take a distribution and that benefit can be preserved even after you pass away.
That being said, the tax liability will fall on the beneficiaries of these accounts as they take distributions. When you inherit retirement assets, your primary options are to take a lump sum distribution or transfer the money to an Inherited IRA. Why an Inherited IRA? As a non-spousal beneficiary, you cannot treat these assets as your own and roll or transfer the funds directly into a new or existing Traditional IRA in your name. These types of inherited funds can never be combined with a non-spouse’s own retirement account assets. As a result, the non-spousal beneficiary can rollover or transfer a tax-deferred retirement account directly into an Inherited IRA (or sometimes referred to as a Beneficiary IRA).
Opening an Inherited IRA can stretch the life of the retirement asset and help preserve the tax deferred status as long as possible. Working with a Financial Advisor is key to help get the correct account type opened. For example, this new Inherited IRA must be titled in some variation of “Your name, as beneficiary of original owner’s name IRA” to segregate the assets from other accounts you may have. An Advisor can also discuss and help you select an appropriate investment strategy based on your age, risk tolerance, and future needs for the assets in the Inherited IRA.
Even though you might transfer the inherited money into an IRA, as a non-spousal beneficiary, you will need to start taking distributions. Depending on the age of the original owner, you may need to even start taking Required Minimum Distributions (RMD) in the same year as the original account owner’s death. These Required Minimum Distributions will need to be calculated and distributed each year by December 31st.
You will always have the option of taking more than the calculated RMD amount each year. Any money taken from this type of account will be included as income for you (as beneficiary) in that tax year and depending on your tax situation, you may have to pay state and federal income taxes on the money taken out. The 10% early withdrawal penalty normally applied to persons under age 59 ½ will not apply to these distributions as they meet an exception and are coded as death distributions.
Contributed by Sabrina Chilson, CISP. Sabrina has been part of the Retirement Services Group at Chemung Canal Trust Company since 2007 and as an IRA Administrator is responsible for the administration of IRAs, individual 403(b) accounts, and pension plan administration.
For additional guidance, especially on your distribution requirements, please contact Marci Cartwright at 607-737-3754 or firstname.lastname@example.org.