Inherited ira investment options
You are using an outdated browser. Please upgrade your browser to improve your experience. By Sandra Block , Senior Associate Editor From Kiplinger's Personal Finance, November Your adult children may covet your s baseball-card collection, but unless there's a mint-condition Willie Mays or Ted Williams in the stack, it won't mean much to their financial security.
An inherited IRA, on the other hand, could let them pay off the mortgage, plug a major hole in their retirement savings and more. Heirs, Avoid This RMD Tax Trap.
But unless you're careful, your children could end up sharing a large part of their inheritance with the IRS. The tax code treats IRAs inherited by children or other heirs differently than IRAs inherited by husbands and wives.
Children and other heirs don't have that option. If the heirs want to continue to benefit from tax-deferred growth, each must roll his portion of the IRA into a separate account known as an inherited IRA, which comes with its own set of rules. To give your children or other heirs this option, you must name them as beneficiaries of the IRA.
Many spouses name each other as beneficiaries, and after one spouse dies the survivor names the estate as the beneficiary. That may seem like the logical approach if your children are the beneficiaries of your estate. Jeffrey Levine, a certified public accountant with Ed Slott and Co.
But naming your children as beneficiaries of the IRA or secondary beneficiaries, if your spouse is still alive gives them a lot more flexibility.
Once they transfer the money to an inherited IRA, they can take annual distributions based on their own life expectancies. A year-old heir, for example, could stretch distributions and the life of the tax shelter over the next 34 years. Bequeathing a Roth IRA to your heirs? A Roth inheritance is usually tax-free, but your heirs can't leave the money in the account forever.
The rules for withdrawals are the same as they are for traditional IRAs. If your heirs transfer the money to accounts for inherited Roth IRAs, they can usually stretch withdrawals over their life expectancies. Your beneficiaries should have funds transferred directly from your IRA to their inherited IRAs. If they receive checks made out to them personally, they'll be prohibited from depositing them in inherited IRAs and will have to pay taxes on the entire amount.
There is no day window to deposit the money in the new accounts, as there is with rollovers of other IRAs. Once the money is safely in the inherited IRAs, your heirs have until December 31 of the year after the year of your death to take their first distribution.
The December 31 deadline is particularly important if you name multiple beneficiaries for your IRA, Levine says. As long as your heirs divide the account among themselves by that date, they can base distributions on individual life expectancies. If they miss the deadline, they'll all have to base distributions on the oldest child's life expectancy.
If any of your heirs have credit problems, take note of a recent Supreme Court ruling that inherited IRAs aren't protected from creditors in bankruptcy proceedings. If your heirs live in one of the 43 states that don't explicitly offer protection for inherited IRAs, one option is to name a trust as the beneficiary, with your heirs as beneficiaries of the trust.
The downside to this strategy is that trusts are complex and expensive to set up; they're also subject to high tax rates if they earn more income than is paid out to the beneficiary in any one year. Still, if you're concerned about your children's creditors, the tax hit may be preferable to the alternative. However, unless you inherit a Roth, you'll have to pay taxes on the money except to the extent, if any, that the original owner made nondeductible contributions.
A large withdrawal could push you into a higher tax bracket. Taking distributions from an inherited IRA based on your life expectancy will minimize the annual tax hit and maximize tax-deferred growth. You can find life-expectancy tables in IRS Publication , Individual Retirement Arrangements IRAs. The life-expectancy factors are different than those used for non-inherited IRAs. Toggle navigation Menu Subscribers Log In.
The Inherited IRA: It's a Great Gift, but Learn the Rules -- The Motley Fool
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Get the Most From Inherited IRAs
If you set the account up wrong, Uncle Sam will be the big winner. Heirs, Avoid This RMD Tax Trap But unless you're careful, your children could end up sharing a large part of their inheritance with the IRS.
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