An Inherited IRA requires careful handling in order to avoid high costs. This is specifically true to non-spouse inheritors because they fall under a different set of rules. Here we’ll discuss common mistakes, advantages, and disadvantages of an Inherited IRA, so you can make the right decision if and when you inherit one.
How To Effectively Manage An Inherited IRA
Inherited IRAs follow a different set of rules, particularly for those other than spouses of the deceased.
Investors should understand what they can and cannot do before making a move they will regret.
You need to make any required withdrawals before Dec. 31. Click here to read more on CNBC.
To make the most out of your inherited IRA, you need to learn the different rules between the spouse and non-spouse inheritors.
Spouse Inherited IRA
With the spouse inheritors, there are various choices to take advantage of. The first thing is to rename the account to your own name. You also have an option to roll over the money free of tax into a new IRA account under your name.
The spouse inheritor has separate options for Traditional IRAs and Roth IRAs. With the traditional account, you can leave the savings alone until you reach your retirement age. While with Roth, you can leave an amount of money for your beneficiaries.
Non-Spouse Inherited IRA
On the other hand, for non-spouse inheritors, conditions can be complicated, and you need to be really careful in managing your inherited IRA. Unlike the spouse inheritor, you cannot roll over the money into your own IRA account, you cannot change the name, and if you decide to take the money from the account you will lose the tax benefits the IRA provides.
Why Do You Need To Be Careful With An Inherited IRA?
Why is careful handling with an inherited IRA important? It will cost you more if you do not handle it correctly. It is more complicated than any other IRA accounts.
Consider hiring an advisor or expert to help walk you through this decision making process. As mentioned earlier, one wrong move with this type of IRA could cease your tax benefits. Just imagine an account with a total amount of $600,000; if you cashed out the full amount all at once you would pay a $250,000 tax.
What you can do as a Non-Spouse Inheritor is take the Required Minimum Distribution (RMD) out early, before December 31. The RMD depends on the life-expectancy of the deceased, and you’ll have that same amount of time to make your withdrawals. These yearly withdrawals are subject to taxes but at a lower rate.
Every retirement plan has a specific set of rules. It is best to understand these in detail and do your research before setting up your own plan or after inheriting an IRA.
Non-Spouse Inheritors Should Be At An Advantage, Not A Disadvantage
With a careful study of the rules of an inherited IRA, non-spouse inheritors are at an advantage if handled properly. Managing an inherited account is complex and complicated so consider asking a financial advisor to guide you. Nevertheless, handle the account with care and use it wisely.
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