Top 5 Considerations when you Inherit an IRA
September 21, 2017
Inheriting a retirement account such as an IRA can be bittersweet; someone has left you a portion of their hard earned wealth which may leave you feeling a strong sense of responsibility for preserving it in the most prudent way possible. Here are some tips to consider as you accept this responsibility.
1. What are you Receiving?
There are various types of IRAs and understanding the basics could save you from making a big (and possibly expensive!) mistake. The two basic types of IRAs are Traditional and Roth. Traditional IRAs are income tax-deferred, meaning income tax will be paid when distributions are made; while Roth IRA distributions are income tax-free.
2. Who Named you as Beneficiary?
If you are receiving the IRA from your Spouse, you can either add it to your own IRA, or open a separate Inherited IRA account. This decision can be based on many factors including your age and your late Spouse’s age. For example, if you are younger than your late Spouse, adding the IRA to your own IRA can postpone the date required distributions must begin or reduce the amount of the required distribution, further enhancing the IRAs tax-deferred growth. If someone other than your Spouse chose you to receive their IRA, a new inherited IRA account must be opened and required minimum distributions must begin based on your life expectancy.
3. When are the Funds Available?
Receiving an inheritance may afford you the ability to accelerate your own goals. If you have more than one type of IRA, drawing from the accounts in the most efficient fashion may help preserve your wealth. Required minimum distributions from your inherited IRA are based on your life expectancy, regardless of the type of IRA, and must be distributed to you each year. Beware! Though you have full access to your inherited IRA at any time without penalty, Traditional inherited IRAs come with income tax consequences. Conversely, a Roth IRA is arguably a better asset to leave to your beneficiaries. Your income tax bracket and state income tax treatment should be considered too.
4. Are there Tax Implications?
Generally, all distributions from Traditional IRAs are taxable to the beneficiary while Roth IRA distributions are non-taxable. For Traditional IRAs, choosing to take only the required minimum distribution each year allows for continued tax-deferred growth while keeping your current tax impact low. For Roth IRAs, continued tax-free growth can be a major advantage. Limiting the distributions from Roth IRAs to the minimum amount required preserves the account for the longest period possible.
5. Don’t Forget Your Own Estate Plan!
Be sure to review any inheritance with your financial advisor and tax preparer so that it can be coordinated with your financial plan before you make any decisions to distribute IRA funds in excess of the minimum amount required. This way, your advisors can explain the impact of various distribution decisions on your overall financial plan and income and estate tax situation. Also, don’t forget to name your own beneficiaries to keep the legacy going!
If you have any questions, don’t hesitate to contact your Relationship Team or email us at Top5@glenmede.com.
Glenmede’s Top 5 is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment, estate planning, tax or legal advice. Investment and wealth advice depends on many individual facts and circumstances we cannot account for here. For legal and tax advice, consult your lawyer or accountant. Opinions or projections herein are based on information available at the time of publication and may change thereafter. Information gathered from other sources is assumed to be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Please contact your Glenmede representative to discuss the applicability of any matter discussed herein.