An Inherited IRA is a retirement savings account opened by the beneficiary of a deceased owner’s Traditional, Roth, Rollover, SEP, or SIMPLE IRA. The owner of an inherited IRA is required to take distributions which are determined by applicable laws. The rules applicable to inherited IRA's were changed by the passage of a new law at the end of 2019 known as The Setting Every Community Up For Retirement Enhancement Act or The SECURE Act.
What to Do When You Inherit an IRA
When most people learn they have inherited an IRA or 401k, it is at a time when they are grieving the loss of someone close to them. An inherited retirement account comes with deadlines and important decisions to be made. The person who named you beneficiary of their retirement account probably wanted you to use it wisely. Yet making decisions about how to handle your inheritance may be very stressful, especially if you have no experience with investing or never had a retirement account before.If you recently inherited funds held in an IRA or an employer sponsored retirement plan such as a 401k, there are several steps you can take to ensure you prudently manage your inheritance:First, read all paperwork or instructions provided by the custodian of the retirement account. Highlight any deadlines or dates by which you must take action and note them on your calendar. Complete any forms required to verify your status as a beneficiary and supply all requested documentation.The second step is to learn about your options regarding the inherited assets. Most IRA and 401k custodians have a designated phone number for beneficiaries to call with questions. Use your first call to the custodian as an opportunity to get information and educate yourself about your options, without making a commitment about your decision. It is generally a good idea to avoid taking any final action regarding your inheritance during the first call. A sales representative of the custodian may try to persuade you to take certain actions to keep the funds invested with their firm. While you may ultimately decide to invest your inherited funds with the custodian, you are under no obligation to take action immediately, provided you take action prior to the expiration of any deadlines. When you contact the custodian, ask the representative to explain your options. Take notes so you can evaluate each option later. Ask the financial adviser or representative if they are familiar with The Secure Act and if the information they are providing is based on changes that went into effect in 2020. It is also a good idea to stay current on personal finance and investing issues that may affect you as the owner of an inherited IRA.After you understand your choices, the third step is to get advice from a trusted advisor. Whether you inherit $5,000 or $500,000, the money left to you in a retirement account could play an important role in your future financial security. If you are not an experienced investor, consult a certified financial planner or CPA. If you do not have an advisor, ask friends, relatives or colleagues for a referral. Meet with the advisor and ask for a recommendation about how to handle your inheritance based on your current circumstances and financial objectives. However, never let a financial advisor sell you something you are not sure about. If the advisor tries to persuade you to make an investment, ask the advisor how he or she is compensated. Do your research and take the time you need to make a good decision. See Questions to Ask Your Financial Planner for more information.After receiving professional advice about your inheritance, it is time to make a decision. Contact the retirement account custodian and submit any required paperwork to carry out your decision within the applicable deadlines.
Deadlines Apply When You Inherit a Retirement Account
If you inherit an IRA with other beneficiaries, you should open your own Inherited IRA to hold your share of the inherited funds within the required deadlines. Contact a representative of the firm where the IRA is held for information on the requirements and deadlines you need to follow for your inherited IRA. To learn more, see inherited IRA rules.
If You Inherited IRA From Spouse
If you are the beneficiary of an IRA from your deceased spouse, contact a financial advisor about your options for taking distributions from the IRA. If you do not need the funds and are concerned about income or estate taxes, contact a CPA or other tax professional for information on how inheriting an IRA may impact your federal and state taxes.
If You Inherited IRA From NonSpouse
If you inherited a retirement account from a parent, other relative, friend or anyone other than your spouse, you will need to review your options for taking distributions from the IRA as a NonSpousal Beneficiary. Due to recent changes in rules applicable to inherited IRA's as a result of The Secure Act, contact a financial adviser or tax professional for information about the requirements and deadlines applicable to your inherited IRA.
Inherited IRA Rules
This page provides a summary of the general rules that apply when a beneficiary inherits an IRA. However, the federal and state laws applicable to retirement accounts change frequently. Inherited assets can increase your income and estate taxes. Only a tax advisor, attorney or financial professional familiar with your unique circumstances can properly advise you regarding the distribution options available to you with an inherited retirement account.Copyright 2020 Pennyborn.com. ALL RIGHTS RESERVED.Updated March 12, 2020.
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