Fall 2019 Quarterly Newsletter
Author: Carl “Bud” Hedstrom, CLU®
Individual Retirement Accounts (IRAs) have been a popular vehicle for retirement savings since they became available more than 40 years ago. A person who has an IRA generally names a beneficiary, which could be a spouse, children, other individuals, an estate, trust, charity or a combination of these. This named beneficiary takes precedent over a will or trust. Often there are questions from beneficiaries regarding when and how they can withdraw money, when they are required to withdraw money, when they have to pay taxes on the money and if there are any penalties involved.
Here are four options to think about when sorting through the transfer process:
1 . Transfer the money to your own account (for spouses only).
For a Traditional IRA, rules are the same as if the account has always been yours. You will have access to the funds, but a penalty will apply to distributions taken before 59½ unless you qualify for one of the IRA penalty exceptions. Taxable distributions are included in your gross income. After age 70½ your account will be subject to annual Required Minimum Distributions (RMDs).
Roth IRA distributions are generally tax and penalty free if you are over 59½ or qualify for a penalty exception (and meet the five-year holding period). There are no RMD requirements for Roth IRAs.
2 . Transfer the money to an Inherited IRA.
This is done typically when an IRA is inherited from someone other than a spouse. However, a spouse can also open an Inherited IRA.
Inherited IRAs continue to grow tax-deferred. This is a viable option for a spouse with a Traditional IRA if they are under 59½ and desire to have income from the IRA. Withdrawals are available with no 10% penalty. However, the income is taxable. If you are a spouse or non-spouse, you are required to take annual RMDs. Earnings from Roth IRAs under this option are generally tax-free if the five-year holding period has been met.
3 . Take all the money now.
This works basically the same for a spouse or non-spouse. You won’t have to pay a 10% early withdrawal penalty, but with a traditional IRA you will pay income taxes on the taxable portion of the distribution. This may move you to a higher tax bracket. Any earnings from a Roth IRA are generally tax-free if the five-year holding period has been met. Assets of both Traditional and Roth IRAs are transferred into an account in your name and then distributed as a lump sum to you.
4 . Choose not to take the money.
This option is not used very often, but you can choose to disclaim the account and allow the assets to pass to alternate beneficiaries to avoid tax implications. If this is your choice, you must act within nine months of the owner’s death and before you take possession of the assets.
As always, we are here to help you with these options and your decisions. Talk to your tax advisor or CPA to help you understand the specific tax implications of your inheritance and the avoidance of any tax penalties.
This article was featured in our Fall 2019 Quarterly Newsletter available here:
Estate Planning, Tax Planning