A Boutique Trusts & Estates Law Firm

Inherited IRA’s

Friday, September 14th, 2012

These days, an Individual Retirement Accounts (“IRAs”) seems to be part of most Americans’ retirement plans. In the event that the owner of an IRA passes away and he or she has designated you as a beneficiary of such account, there are many issues for you to consider prior to distribution. However, when inheriting an IRA, there are several hidden issues to consider.

1. Lump Sum Payments versus Annual Withdrawals

For many beneficiaries, especially those who have experienced a decrease in their own net worth because of the recent economic downturn, accepting the proceeds of an inherited IRA in a lump sum payment and liquidating the account may seem like the best option. However, after taxes are paid, the net amount is typically much lower than one might expect. In lieu of a lump sum payment, a beneficiary should consider leaving the inherited IRA in place and taking the required annual withdrawal tax-free.

2. Re-titling the Account

Inherited IRAs need to be retitled correctly. Without correct titling, the IRS may consider the change a distribution subject to tax, which would defeat the purpose of continuing the IRA.

3. Was the Decedent Older Than 70 1/2?

After age 70 1/2, an IRA owner is required to make annual withdrawals by December 31st. As the beneficiary of the IRA you should know that if the mandatory withdrawal has not been taken within a year of the date of the original owner’s death, there is a 50% penalty imposed upon the amount of the required withdrawal.

4. Required Distributions are Different for Inherited Accounts

Make sure the custodian of your inherited IRA is calculating your required distributions correctly. The same formula is not used for an inherited IRA and a personal IRA. In addition, you should be aware that although Roth IRAs do not require minimum distributions for the owner of the IRA, an inherited Roth IRA does have a minimum withdrawal requirement.

To protect the Beneficiaries of Your IRAs, Please Consider the Following:

– Keep a copy of your beneficiary designation forms with your Last Will and Testament and other estate planning documents. There is a chance that the IRA custodian will misplace your beneficiary designation forms, delaying the distribution for your heirs.

– Consider establishing a trust that requires income distributions to protect inherited IRA’s for your young children.

For more information on how Frankel Sims Law can help you transfer wealth to the next generation effectively and tax efficiently call our office for a consultation today at (410) 828-7775.