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 the IRS does crack 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 before the end of 2019, otherwise, 72 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 72. 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 72.
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 a 10 year period, 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.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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