While an IRA is designed to supplement retirement income, many IRAs are passed on to spouses, children or other beneficiaries with large balances of money. When a beneficiary claims the IRA, he or she has several options as to how he or she can proceed with the inherited assets. The first option is to take a lump-sum distribution, which means the entire amount is added to ordinary income for the year the distribution is taken. The other option is to stretch the IRA assets by opening an inherited IRA and take the funds over time.
Speak with a tax adviser regarding the best option for your situation. If you are not seeking a lump-sum distribution, you must either complete the distribution by December 31 five years after the death or you can take a lifetime of distributions with a lump sum paid to your heirs if you die before the IRA is depleted.
Call or visit the IRA custodian. Request the appropriate paperwork to set up the inherited IRA based on your final distribution decision, which is irreversible.
Fill out the paperwork, marking the proper boxes designating whether you are taking a lifetime income, five-year distribution or a lump sum.
Submit the paperwork and wait for the distribution(s) to occur.
Tips & Warnings
- Spouses have one more option when inheriting an IRA, which is to roll it into a personal IRA account and treat it as their own IRA.
- Beneficiaries must pay taxes on the IRA as ordinary income. Additionally, the IRA is considered part of the entire estate and counted in federal estate transfer tax values. Be sure to seek the advice of a tax adviser when dealing with IRA inheritances.
Is an Inherited IRA Taxable?
When a family member dies and leaves an IRA to you, you become the beneficiary. Because IRAs are tax shelters, they are...
Inherited Roth IRA Tax Rules
If you inherit a Roth IRA, the rules are the same as inheriting a traditional IRA before the owner begins taking distributions....
How to Convert an Inherited IRA to a Roth
A person inheriting an IRA has several options on how to take the money. Any beneficiary has the option of a lump-sum...