How to Manage an Inherited IRA

By some estimates, $84T of assets are going to change hands from an older generation to the younger generation over the next two decades. Of that, about $11.5T are what’s called IRA assets or pre-tax money. And those assets, they’re going to be changing hands as well over the next 20 years. So let’s talk about inherited IRAs today. What they are, how they operate and what are those pesky distribution rules that you need to be aware of? So first off, what’s an inherited IRA? Well an inherited IRA is basically an individual retirement account that a beneficiary receives when the original account owner passes away. And typically these inherited IRAs are passed on to spouses, children, grandchildren or other family members. But you can also pass them on to charities as well, if you would like. Now how do these kind of operate, if you will, these inherited IRAs. Well, the big thing for you to remember is that these are all pre-tax accounts, okay? So you have a partner in these accounts and that is Uncle Sam. So when you take money out of these accounts, well you’ve got to pay tax on that, right? So don’t forget that. But there’s also a bunch of different rules and regulations if you will, on when to take distributions and how you’re supposed to take distributions. And it can get very confusing. But the IRS has boiled it down into basically two different categories of beneficiaries and then you go from there, okay? So the first category is what’s called an Eligible Designated Beneficiary, okay? So to be an Eligible Designated Beneficiary you’re either a surviving spouse, a disabled person, a chronically ill individual, someone that’s not more than 10 years younger than the original account owner when they pass or a minor child. So if you fall into one of those, then you’re an Eligible Designated Beneficiary. Now the other category is what’s called a Non-Eligible Designated Beneficiary. And essentially what this is, is a non-spouse that is more than 10 years younger that the original account owner when passing and not a minor child, okay? So you can see here, we’re starting to really get in the weeds, right? This is becoming a little bit confusing. Well which category do I fall into? How do I know if I’m on the right path and so forth? So this is my mid-segment disclaimer, okay? Make sure before you do anything with inherited funds like this, that you’re meeting with a Financial Advisor, your Accountant, somebody that understands all of the ins and outs of inherited accounts, okay? Now once you determine what type of beneficiary you are, you can then determine what your distribution rules are. Now I don’t want to get too far into the weeds, because I don’t have enough time for that today. But let’s go over two common scenarios that we often see with inherited IRAs, okay? The first most common situation is when a spouse passes away. Okay, the spouse leave the IRA assets to the surviving spouse. Okay, if this were to happen, well the surviving spouse that inherits the IRA, it’s pretty simple. They just have to assume the IRA as their own. And then their normal distribution rules apply for that IRA. Okay, now there are some caveats to that. So again, meet with your professional to go over those. But that’s the most simple route that you can take there with a surviving spouse. Then the other common scenario that we see is for when someone that’s younger, more than 10 years younger than the original account owner, not a minor child and not a spouse. So this would be like your parents are you know in retirement age that pass away and they leave an adult child the assets. In this scenario, you would be subject to the 10 year distribution rule. So you would open up an inherited IRA. The money would come from your parents’ IRA over to your inherited IRA. And then you would have to deplete the entire inherited IRA within a 10 year time period. Now you could take it all out in one year, but as we’ve discussed before, this all taxable money, right? So if it’s a large balance that you’re inheriting and you take it all out in one year, that’s a big tax hit that you could have. So most of the time, it makes a lot of sense to stretch it out over that 10 year time period. You just have to make sure you don’t overdue it and not take it all out within that 10 year period. Otherwise, there’s penalties. So if you have questions on inherited IRAs, what to do? How they operate and so forth, please give us a call at the number on the screen. We’d be happy to help.