How To Manage an Inherited IRA

An inherited IRA is always good. You get to have the retirement money that someone left for you. However, inherited IRAs can be a bit tricky for some individuals. There are certain boundaries and rules that you should be aware of when dealing with an inherited IRA. Read the tips below to know how you can manage your inherited IRA.

  • Know the rules. You should know the rules of the inherited IRA first before you decide to do anything with it. This will help you manage the money that you will get. Spouses can transfer the inherited IRA to their own IRA or let the account stand as a beneficiary IRA. For other beneficiaries, it is important to rename the IRA and state where the inheritance came from and how it was inherited. If there is more than one beneficiary, the inherited IRA can be split for the beneficiaries.
  • Taking distributions. If you are not a spouse of the one who provided the inherited IRA, you must take the distributions of the inherited IRA starting from December 31 the year after you inherited the IRA. You will have to take the required minimum distribution from the inherited IRA. This is important so that the remaining balance on the account can be distributed according to your life expectancy. As a beneficiary, it is your duty to calculate the required death distribution amount in order to satisfy rules of the IRA.
  • One individual. If you are the sole beneficiary of the inherited IRA and you are not the spouse, the 5-year rule applies. This means that you can withdraw the assets in lump sum before December 31 in the 5th year after the benefactor died. You can also withdraw the assets in installments if that is what you prefer. Choose carefully since your choice can affect your taxes.
  • Inherited IRA tax. Another thing that you should be aware of is the taxes associated with the inherited IRA. Paying taxes for inherited IRAs are the same as any IRA. You have to pay an income tax with the IRA withdrawal. The money that you get from the withdrawal from the inherited IRA will be added to your income for the year so you have to think hard if you want to withdraw in lump sum or installments.
  • Disclaim the inheritance. If you have no need for the inherited IRA, you can disclaim the inheritance. The inherited IRA will then be passed on to the next beneficiary in line after you. This is a smart move if you do not want to have additional taxes added to you. Do this only if you have no need of the money that you can get from the inherited IRA.

These are some of the rules and tips that you can follow if you want to learn how to manage your inherited IRA. Remember that the rules may vary for every situation so it is important that you know all the options that you have first so that you can make the right decision.


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