Risk & Business Magazine CEO/CFO Business Today Magazine | Page 31

INHERITED
M
ost people know that an
Individual Retirement
Account (IRA) can be a
useful tool in helping to save
for retirement. Oftentimes, the account
has years and years of compounded
and tax-advantaged growth built up
by the time the owner begins to access
the funds. Very often, in fact, there are
funds left over in the account when the
owner of the IRA passes away. And that
is when things can become complicated.
The actual leaving of an IRA to a
beneficiary is pretty straightforward.
Being the recipient of the IRA, however,
requires that heirs understand a fairly
rigid set of IRS regulations and the
deadlines that they must meet to stretch
the account for years to come.
BENEFICIARY FORMS!
The very first and most important step
is for the IRA owner to name his or her
heirs on the account’s beneficiary form.
A spouse will likely inherit the IRA no
matter what. Nonspouse beneficiaries,
however, must be listed on the form to
be allowed to stretch distributions over
their lifetime and retain the tax shelter.
If they’re not the named beneficiary,
the so-called “stretch provision” goes
away and the tax protection is lost (the
“stretch-provision” will be explained in
more detail below).
ALL HEIRS ARE NOT THE SAME
When a spouse inherits an IRA, that
spouse can either take the inherited IRA
as their own or remain a beneficiary. The
age of the survivor is one of the biggest
factors in making that determination. A
surviving spouse who has not yet turned
59½ can take funds out of an inherited
IRA with no early withdrawal penalty
(usually 10 percent). If they move the
IRA into their own IRA, they lose that
advantage. Once the surviving spouse
is over 59½ and can take withdrawals
penalty free no matter what, they can
roll the account into their own IRA and
then delay any additional withdrawals
(if they so choose) until age 70½ (keep in
mind that with a Roth IRA, the 70½ rule
does not apply).
When a nonspouse inherits an IRA,
the rules are a very different story.
Nonspouse beneficiaries can choose one
of three options:
1) They can take a lump sum distribution
where the entire distribution is taxed as
income in the year in which it is received.
2) They can withdraw all the funds from
the IRA by December 31st of the fifth
year following the IRA account owner’s
death. Each withdrawal will be included
in your taxable income during the year
the funds are withdrawn. You don’t have
to take the distributions in installments,
but you must withdraw all the funds
prior to the applicable December 31st
date.
3) They can take distributions over their
own life expectancy, leaving the bulk of
the account to continue to grow tax-
deferred. This is often referred to as a
“Stretch IRA.”
complicating factors that could impact
your options. For example, if the account
is a Roth IRA and not a Traditional
IRA, the taxation is different, but the
nonspouse will still have required
minimum distributions if they utilize
the stretch provision. Likewise, if there
are multiple beneficiaries on the account,
each may stretch their withdrawals but
only if the account is split between the
individual beneficiaries by December
31st of the year following the owner’s
death.
One of the most important steps to
take when you inherit an IRA is to slow
down and not make any quick decisions.
Mistakes made in this situation are
generally costly and permanent. With
a little planning, however, your loved
ones can squeeze the most out of the IRA
rules for years, or possibly decades, to
come. +
The “stretch”
provision
mentioned
above allows
a nonspouse
beneficiary to
slowly withdraw
funds over the
course of their
own lifetime. If
you do nothing,
the IRA will
automatically
convert to option
two above
and you will
be required to
withdrawal the
entire account
within five years.
You have until
December 31st
the year after
the person who
opened the IRA
dies to make your
decision.
Keep in mind
that there are
additional
potentially
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