Jul
10
FAQ: Rules About Inherited IRAs
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Q.  I am 38 years old.  My grandmother named me as the beneficiary on her traditional IRA, which has $400,000 in it.  Can I roll this account over into my own IRA and defer withdrawals until I'm 60?  
A.  Despite the U.S. Supreme Court ruling regarding creditor protection of IRAs, the basic rules relating to inherited IRAs remain the same. A non-spousal IRA heir must withdraw a minimum amount each year beginning December 31st of the year after the IRA owner died. So, if the IRA owner died in 2013, the non-spouse heir of the IRA must take a minimum withdrawal before December 31, 2014.  This rule applies regardless of whether the IRA is a traditional or ROTH.  The minimum amount that must be withdrawn is calculated according to a formula:  Take the balance of the IRA on December 31st of the prior year (in this example, December 31, 2013, and divide it by the non-spousal heir's life expectancy. What is your life expectancy?  Believe it or not, the IRS answers that question for you!  It is based on the IRS's "Single Life Expectancy" table (available at IRS Publication 590.  An heir of a traditional IRA will pay income tax on the required distribution; an heir of a ROTH IRA will not. This presents a problem for heirs in a higher tax bracket. It is always a good idea to consult your financial advisor or accountant when calculating the minimum amount you need to withdraw and to plan comprehensively for the tax impact. IRA heirs also have an option to "stretch out" payments over their own life expectancy. The stretch-out has benefits as it literally stretches out the tax advantages of the IRA, namely tax-free growth. This can provide income-tax deferred growth (for a traditional IRA) and tax-free growth (for a ROTH IRA) and can be a key piece of any retirement strategy, no matter how young or old the inheritor is.
Posted under: Tax Law

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