Making an estate plan is vital to leaving a strong legacy and to address issues that can arise when assets transfer to new owners, such as those with retirement accounts. Sinclair Prosser Gasior can provide individuals who are making an estate plan and want to ensure the right person or entity inherits their IRA and their other assets. Also, we can assist those who inherit IRAs through estate administration.
While inheritances can be complicated under any circumstances, inheriting an IRA can be an especially complex situation to deal with. IRAs, or Individual Retirement Accounts, were given special tax treatment during the lifetime of the person who invested in the IRA. As a result, there are specific rules for what can be done with an inherited IRA without potentially losing tax benefits and even potentially triggering penalties. The process of deciding what to do with an inherited IRA can be very confusing and there are various time frames to consider, so a professional should be consulted on the options.
If you inherit an IRA from your spouse, you have more options available to you than if you inherit an IRA from someone to whom you are not married. The IRS provides for three primary options when you inherit an IRA from your spouse. First, you can transfer all of the assets into your own IRA and treat them as if they have always been yours, following the rules for withdrawing the assets that apply to you. Second, you could transfer assets into an inherited IRA, which would allow you to take money out on a different schedule without withdrawal penalties, and there are various options, such as within five years or use a life expectancy option, to take out funds. Finally, the last option is to take a lump sum distribution of all assets in the IRA. Also, there are income taxes to consider when the assets are withdrawn from the IRA.
When you inherit assets from someone who is not your spouse, you are not able to just roll the account over into your IRA. Depending on the situation, you could choose between the life expectancy option, the five year option, or a lump sum distribution. If you want to use the life expectancy option, there is a limited amount of time to start taking distributions of the IRA funds, or there may be tax consequences.
Deciding what should happen to an IRA is just one of many decisions that you will need to make when you make an estate plan. Sinclair Prosser Gasior can help those who are making plans for their legacy, as well as heirs or beneficiaries who inherit after someone has passed.