Four Tips for Individuals Inheriting an IRA

So you’ve just inherited an individual retirement account (IRA). If you know how to manage it, you can stretch out the tax breaks for decades.

Following are some tips to help you:

Don’t Do Anything Until You Know What Rules Apply: Money must be transferred from one IRA custodian to another via what is called a ”trustee to trustee” transfer – and unless you’ve inherited from a spouse, you must re-title it, including the original owner’s name and indicating it is inherited.

Understand the Beneficiary Form: The IRA custodian will hold a beneficiary form that controls both who inherits the IRA and its ability to be stretched out. If there’s no beneficiary form on file, heirs are at the mercy of the IRA custodian’s default policy.

Know the Rules: If nonspouses are named as heirs, they must begin taking distributions from the account by December 31 of the year after inheriting it, although they can draw these out over their own expected lifespans, enjoying decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA.

Plan for the Future: You may pass the IRA on someday, too, so plan for that. To give your heirs flexibility, you may want to name both primary and alternate beneficiaries. Your primary beneficiary (say, your spouse) will then have the option of turning down the account, enabling it to pass to the alternate (say, your children).

A great deal is at stake. Managing an inherited IRA correctly could help enlarge an inheritance.

Making a mistake could disqualify the account from its tax-deferred status and trigger a big tax bill.

A financial advisor can help you navigate the process of inheriting an IRA.

The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax advisor for advice and information concerning their particular circumstances.