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Minimizing Taxes when you inherit an IRA

Minimizing Taxes when you inherit an IRA

In the coming decades, Generation X and the millennium generation will be the beneficiaries of one of the most massive wealth transfers in history. Some of them will be in the form of IRAs of your parents, grandparents and other relatives.

An individual retirement account (IRA) can be a significant benefit to the beneficiary. Who cannot use extra money in retirement? Depending on the relationship between the prisoner and the heir, an inherited IRA can be a total surprise for the recipient. Most inherited IRAs are paid within six months of the death of the family member. Without proper planning, state and federal taxes can significantly reduce profits. The IRS has special rules to follow. Knowing the extravagant legacy, IRA rules are essential for the CPA to ensure that these accounts are managed in the best possible way for their clients.

If you inherit an IRA (individual retirement account), you will have no immediate tax consequences. The inheritance of an IRA is not a taxable event, according to the Internal Revenue Service. When you withdraw money, you can deal with the tax consequences. In many cases, the IRS requires annual distributions of inherited IRAs, so it may be necessary to manage taxes each year. Some situations allow you to avoid any load.


Being a beneficiary of the IRA does not mean that you have to accept it. If you refuse, you can avoid taxes on an inheritance from the IRA altogether. When you give up an IRA, for legal reasons, it's as if you were dead. The next online beneficiary will inherit the IRA. You will have no tax consequences for abandoning the inherited IRA. However, you must act within nine months of the death of the account holder. Otherwise, the IRA will send you a legal notice.

Option for inherited IRAs

There are several options for traditional non-marital IRAs, depending on the age of the deceased. (This article does not cover marital IRA: a spouse who inherits an IRA may consider it to be his). An account holder over 70 and a half years of age is required to begin receiving a minimum distribution of account needed (RMDs) by April 1 of the year following the 70 (start date) Is obligatory. If the deceased has already passed the required start date, there are only two options:

1. Adopt a lump sum distribution of the entire budget;

2. Restore the IRA's legacy to a new account and spread it over the long life of the beneficiary or the deceased.

If the account holder has died before the desired start date, the beneficiary has a third option to withdraw all IRI funds by the end of the year containing the fifth anniversary of the death of the deceased, in years. Also, in the second option, the life expectancy of the beneficiary should be used. If the received IRA was a Roth IRA, the RMD rules apply to deceased persons who died before the required start date. To make sure your customers choose the best option for your situation, here are some tips to keep in mind:

Keep the beneficiaries' designations up to date.

Marriage, separation and the birth of children can change succession plans. Many people do not realize that an IRA works by designating beneficiaries rather than by will. If the will says that I leave everything to my wife, but they have another name for the beneficiary designations in the IRA, it is generally given to the beneficiary in IRA documentation.

Make sure the new IRA name is correctly named.

An inherited IRA must be called the name of the deceased and the beneficiary and must indicate that it is an inherited IRA using words such as "inheritance" or "beneficiary." Here is an example of the correct titration: "Jane Doe, the day of death," F / B / O (in favor) of John Doe, the beneficiary. If you change the name of this IRA, this is a reminder. This means that the investment of the IRA only on behalf of the beneficiary will be considered as a distribution of the total balance of the taxable IRA where the deceased held the IRA before the recipient moved to his or her Brokerage.

Make sure the deceased has had the necessary RMDs in the year of death.

This is one of the biggest traps when the deceased is over 70 years old and died before the annual distribution. You must have the required minimum distribution by the end of the year or a penalty of 50%, and you must still make the distribution.

Pay attention to legal deadlines.

According to the life expectancy method, the first RMD must be taken before December 31 of the year following the death of the deceased. It is also the deadline for choosing the five-year method if the dead has not yet been distributed.

Consider the impact of possible future tax increases.

Even if a one-time distribution full or more significant than five years entails substantial expenses, you can save on long-term taxes if tax rates increase in the future. If a client's primary sources of retirement income are in pre-tax accounts, raising rates can be catastrophic.

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