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Inherited an IRA? Here Are 5 Steps You Should Take

30 July 2019 No Comment

An IRA (or Individual Retirement Account) can be a very lucrative thing to inherit. However, the steps to successfully receiving the benefit of an inherited IRA can be complicated, and a mistake can be costly. To avoid a big tax bill that could come with the mishandling of the account, follow these tips and get help with IRA inheritance by talking to aa bank of financial advisor experienced in these matters.

  1. Find out if you’re the designated beneficiary or if you’re inherited it through the will

There are two ways you can inherit an IRA: as the designated beneficiary or through the will. If you’re the designated beneficiary, you can use your life expectancy at the age you will be at the end of the year following the passing of the IRA’s owner. For each succeeding year, you can subtract one from the prior year’s factor to help determine the distribution amount for the current year.

If you inherit the IRA through a will or estate, you are known as a non-designated beneficiary. This means that the age of the original IRA owner at the time of their death will be what determines the distribution options available to you. For example, if the original owner had not reached the date of their first distribution after 70 years of age, then you must empty the account by the end of the fifth year after death.

However, if the original owner dies after starting their distributions after 70 years old, you’re allowed to take minimum distributions based on the age of the original owner at the time of their death.

  1. Know if you’re the sole beneficiary or one of many

Many people name multiple recipients for an IRA. If the IRA you’ve inherited has various beneficiaries, you can each use your life expectancy so long as the IRA is split into multiple accounts. Though there is a deadline to keep in mind to split these accounts.

  1. Set up your new IRA correctly

Once you’ve inherited an IRA, it must be set up correctly to stretch distributions. The inherited IRA must have the name of the original, deceased owner, and that the IRA is inherited. Only the deceased owner’s spouse can roll over an inherited IRA in their name. Otherwise, it has to be kept as a separate account.

  1. Figure out who your beneficiary would be

An essential part of the process of setting up your inherited IRA is naming your beneficiary. If the heir of an IRA passes away before the IRA account is emptied, their beneficiary will be able to continue taking distributions.

  1. Figure out the correct distribution amount

When you’re calculating the right distribution amount from an inherited IRA, you’re going to need two pieces of information: The prior year account value at the end of the year, and life expectancy.

Year-end value: To determine the minimum distribution, you’ll want to use the account value as it stood at the end of the prior year. The first distribution from an inherited IRA has to happen by December 31st of the following year, after death. If the end of the preceding year didn’t split the account, its value is divided by the percentage you’ve inherited.

Life expectancy: Calculating life expectancy will only need to be done once. Using the table for non-spouse beneficiaries in the IRS publication 590-B titled Single Life Expectancy table, you will find your age after the year of the original IRA owner’s death. Each subsequent year, you subtract one from the prior year’s factor.

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