Estate planning attorney offers tips for non-spouse inheritors of IRAs

Michele Ungvarsky (SWS Columnist) | June, 2017 | Columns, Features


Inheriting an IRA can be a financial blessing, but you have to be extremely careful about withdrawing the funds. There are some mistakes you can make that can result in a missed opportunity for tax-deferred growth, or worse, a massive tax bill.

Luckily, surviving spouses have some leeway. It is still tricky to transfer from spouse to spouse. However, the rules for spouses are different from non-spouses.

If you have more than one beneficiary, it may seem logical to name the estate as beneficiary. This is not a good idea. In this case, your beneficiaries will be required to take all of the money out of the IRA by the end of the fifth year after your death — missing the opportunity to accumulate interest and enjoy the tax sheltering benefit.

Owners of traditional IRAs must start taking required minimum distribution (RMD) when they turn 70 and a half. Non-spouse beneficiaries must start taking RMDs upon inheriting. This means you cannot leave the entire amount in the account, allowing it to draw interest. The penalty for not taking RMDs on time is steep: a full 50 percent penalty on the amount that should have been withdrawn for the year.

Unfortunately, non-spouse beneficiaries cannot roll an inherited IRA into their own IRA. A separate account Inherited IRA must be set up and titled so that it includes the decedent’s name and the name of the person inheriting an indication of the purpose of the IRA. For example, it might say, “Rhonda Smith (deceased January 7, 2015) IRA for the benefit of Roy Smith.” If the account is split among beneficiaries, the original IRA must be split into separate IRAs, and each one must be titled in the same manner.

To avoid this pitfall, name your children as beneficiaries of the IRA, and not the estate. By doing so, they will have a lot more flexibility. They can take annual distributions based on their life expectancy which allows them to leave the money in the account and defer taxes.

Roth (not traditional) IRAs can usually be withdrawn tax-free. However, they will be prohibited from depositing them into their IRAs, and they will have to pay taxes on the whole amount.

These issues above are just some of the traps you can fall in when inheriting an IRA. When it comes to transferring IRAs, it is critical to seek the advice of a qualified, experienced estate attorney or a financial planner. They can help you decide whether or not to withdraw the funds or set up an Inherited IRA.

If you have questions about how to inherit an IRA or if you want to make sure the beneficiaries on your IRA are set up correctly, give Estrada Law a call at 556-2462. And to learn more about estate planning attend one of our no cost no obligation workshops. Call 556-2462 and reserve a seat today.



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