You've inherited an IRA -- now what?
The rules governing inherited IRAs are likely more complicated than you thought.
This post comes from Rob Berger at partner blog The Dough Roller.
My stepmother had a couple of IRA accounts. As you may know, with an IRA you can select the beneficiaries who will inherit the account when you die. As such, the funds do not transfer through a will or the estate. Instead, the account transfers directly to the beneficiaries you select.
Tip: Select both primary and secondary beneficiaries for your IRAs, such as a spouse as the primary and your children as the secondary. This gives your spouse the option of disclaiming the IRA account and having it pass directly to your children.
The rules of inherited IRAs, however, are really complicated. So before I get to five things you should know about these types of accounts, Rule No. 1 is: Seek professional advice.
In my case, Vanguard was extremely helpful. Because they do this for a living, so to speak, they can walk you through the required steps. So wherever you open your inherited IRA account, let the pros walk you through the process.
Spouse vs. non-spouse
The rules of an inherited IRA are different for a spouse than for everybody else. A spouse can elect to be treated as the owner of the IRA, rather than a beneficiary. That means, among other things, that you may be able to continue contributing to the IRA, and your required distributions are different from those for non-spouse beneficiaries. IRS Publication 590 has some helpful information on the differences between a spouse and non-spouse beneficiary.
Forget the 60-day rule
Remember the 60-day rule that allows you to take money out of an IRA penalty- and tax-free, as long as you put it back into the same type of IRA within 60 days? It doesn't apply to inherited IRAs. And that means, among other things, that if you want to move the IRA to a new custodian, it needs to be through a direct transfer.
Understand your distribution options
For non-spouse beneficiaries, you have two options when it comes to distributions. You can choose to withdrawal money from the IRA each year, the amount determined based on your life expectancy. This is referred to as the "stretch option." Or you can take all of the money out within five years of the original owner's death.
Those are your options. The good news is that there are no penalties for these withdrawals, even if you haven't reached 59 1/2. The bad news is the distributions will be subject to income tax.
Make up your mind
If you are going to select the stretch option, you must take your first required minimum distribution no later than Dec. 31 in the year following the year the original owner died. If you miss this deadline, you'll be forced to follow the five-year rule on distributions.
Remember mandatory distributions
If the original owner was 70 1/2 or older, he or she was required to take mandatory distributions each year. As a result, you need to find out if the owner made the required withdrawal during the year of his or her death.
As I said at the start, inherited IRAs are really tricky. So I can't stress enough the importance of working with a professional to guide you through the process.
More from The Dough Roller and MSN Money:
- 8 ways a paper scanner makes life beautiful
- The best rewards credit cards of 2012
- The best bank CD rates of 2012
- Smart Spending on the go: Get our app for Android or iPhone
- LGBT tax, estate hurdles abound
- 8 reasons you need a Roth IRA
If the corrupt Republican corporate MONARCHY wouldn't have STOLEN OUR PENSIONS & gave us their INSURANCE IRA account that says if they fail so do you and I fail, we wouldn't have to be concerned about ALL THIS PROFESSIONAL HELP!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
ABOUT SMART SPENDING
Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.
A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.
LATEST BLOG POSTS
A single mom is taking a McDonald's franchise to court, saying she was forced to accept with a fee-heavy 'payroll card' instead of a check or direct deposit.