Inherited an IRA? Here’s what you should do!

Individual Retirement Accounts (IRAs) often are the largest asset passed on to heirs. The biggest advantage of IRAs is tax deferral. The good news for beneficiaries is that you can S T R E T C H the advantage out over your lifetime. It’s not hard to take advantage of this opportunity. This article tells you how.

The rules for handling inherited IRAs are different for surviving spouses, nonspousal beneficiaries and beneficiaries who are not persons (such as an estate or a charity). This article deals only with the rules for spousal beneficiaries.

The ideal way to handle your inheritance is to place the money into an IRA owned by you, as the surviving spouse. This preserves the tax deferral advantage of the IRA, allows you to name your own beneficiaries, and stretches the period for the required withdrawals over your life expectancy. We’ve listed the steps you should take below.

1. Transfer the money to your own IRA: Transfer the money to your own IRA with BWFA. The account to which you transfer the inherited money can be a new or existing IRA in your name as the surviving spouse. Deposit your share of the IRA and any other inherited retirement account balances into it. Do this prior to September 30th of the year following the death of the IRA account owner. Note: If you are substantially older than your spouse at the time of their death, then a different solution may be better. See “To Transfer or Not” at the end of this article.

2. Name new beneficiaries: Make certain to name both primary and contingent beneficiaries. These persons, trusts or charities will receive the balance of the IRA.

3. Determine the cost basis of the IRA owner: It is important to know that when you inherit an IRA you also inherit the cost basis. Since this money has been taxed already, you don’t have to pay tax on it again upon its distribution to you. Cost basis occurs when nondeductible contributions are made to the IRA.

4. Make your required minimum distributions: The rules for determining the amount of your minimum required distribution are different depending on whether you transfer the money into an IRA of your own or leave the money in your deceased spouse’s IRA.

To Transfer or Not

If you transferred money to your own IRA, you would be required to take yearly distributions based on your life expectancy. If you are not yet age 701/2, you will be able to wait until that time before you must begin distributing.

If you decide NOT to transfer the money to your own IRA and your spouse was not yet age 701/2, you must take the distributions within 5 years of the date of death. This is not a good option, because it accelerates the taxes due, negates years of tax deferred growth, and prevents you from naming new beneficiaries on the IRA. This is why your best option is to transfer the money into your own IRA. If your spouse was age 701/2 or older at the time of their death, you have 2 options: (1) take distributions over your own life expectancy, or (2) take distributions based on the single life expectancy of your deceased spouse.

If you were older than your spouse, and your spouse lived to be 701/2, you can choose to leave the money in your spouse’s IRA and take the distributions over your spouse’s single life expectancy. This will be a very rare situation and would only be advisable under these very restrictive conditions.

Obviously, these rules can be confusing at a time when you are most unprepared to deal with complex issues. We are always available to advise you as the need arises.