As an estate planning lawyer in Orange County, I am often asked to help people who inherit a retirement account. The action you need to take with an inherited IRA depends upon your unique situation; the IRS has rules for each and recently announced that they will be cracking down on taxpayers who make mistakes with inherited IRAs. Here are some inherited IRA scenarios and options for each:
If the account you inherit was a 401(k) or traditional IRA and the decedent was at least 70 ½ years old: Contact the financial institution that holds the account to determine if the decedent had already taken the required minimum distribution for the year they died. If they did not, you will need to do so.
If you are the spouse of the deceased account owner: You can roll an inherited IRA into your own IRA to postpone taking distributions until you turn 70 ½. If you take distributions before you turn 59 ½, you may be subject to early withdrawal penalties. You can also leave it where it is and postpone taking the required minimum distribution until your deceased spouse would have turned 70 ½.
If you are not the spouse: You must first re-title the account to name you as the beneficiary. You will then be required to start taking required minimum distributions, which can be stretched out over your lifetime, beginning by Dec. 31 of the year following the death of the account owner.
If there are secondary beneficiaries: You have the option of disclaiming the inherited account, which will allow it to pass directly to the secondary beneficiaries. This is usually done to avoid creditors or to minimize income or estate taxes.
If there are multiple beneficiaries: You are allowed to split the account into separate IRAs for each beneficiary.
These are only general guidelines; it’s important that you consult a professional for specific information about what to do in your individual situation. If you’d like to learn more about how to treat inherited IRAs or have other estate planning questions, call our office today to schedule a time for us to sit down and talk. We normally charge $750 for a Family Wealth Planning Session, but because this planning is so important, I’ve made space for the next two people who mention this article to have a complete planning session at no charge. Call today and mention this article.