Inherited IRAs

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What you need to know

Hello Everyone. I hope that the first quarter of 2018 has been a good one for you. I thought I would begin this article with a brief market outlook for 2018. As some of you may know, the market has seen a lot of ups and a lot of downs thus far this year. This is something many people have asked me about throughout the first quarter of this year. For the last seven to eight years, the market has seen a tremendous amount of steady growth, paired with little to no volatility. This is an aberration of the norm, and I expect that we will continue to see volatility throughout the remainder of 2018.

Moving forward, I also have been getting many questions regarding inherited individual retirement accounts (IRAs). So, what exactly is an inherited IRA? This is a form of an IRA that is opened by a beneficiary when the owner of an IRA or 401(k) plan dies. Beneficiaries of Roth and Traditional IRA’s are lawfully required to take Required Minimum Distributions (RMDs), except for a special exemption for spouses (see below). However, by employing an Inherited IRA, the funds can remain tax deferred. Inherited IRAs have complex rules, which will be discussed over the course of this article.

Inherited IRA rules

Inherited IRA rules differ based on whether the beneficiary is a surviving spouse or not. If the beneficiary is a surviving spouse, they can roll the inherited IRA balance into a new IRA in his or her own name. In the event the spouse is the sole beneficiary, the inherited IRA may be redesignated into the surviving spouse’s name. As the account owner, the surviving spouse can make contributions and name beneficiaries. They also have the ability to avoid required minimum distributions (RMDs) if the account is a Roth IRA. RMDs are always required from a traditional IRA, however they do not need to be taken until the surviving spouse reaches age 70½. These RMDs are now based on the surviving spouse’s life expectancy.

Now, what about non-spouse beneficiaries? Any non-spouse, as well as any surviving spouse who does not treat the inherited IRA as their own, may not make additional contributions to the IRA. However, they can name what we term “successor” beneficiaries. There are four separate distribution options for all designate beneficiaries.

RMD distribution methods

The Life Expectancy Method involves taking RMDs over the life expectancy of the beneficiary. Typically, a non-spouse beneficiary must start taking distributions by December 31st of the year after the death of the owner of the IRA. A spouse of the owner may be able to delay RMDs until the year the owner would have reached the age of 70½.

The Five-Year Rule says that if the owner died before reaching the age of 70½, the beneficiary can complete the RMD rules by liquidating all assets within a five-year time period, which ends on December 21st of the fifth year following the owner’s death. Liquidation can occur in one or multiple distributions.

Beneficiaries may also take a Lump-Sum Distribution. The beneficiary can always withdraw his or her entire share of an Inherited IRA by December 31st of the year following the owner’s death. Careful thought must be given to this – you should always think twice before liquidating a large account.

Lastly, a beneficiary has the right to disclaim the inherited funds. Doing such would be appropriate if you do not have need for the funds and would prefer the funds pass to another beneficiary with greater needs, or one who could be subject to lower RMDs. This would effectively allow the funds more time to grow. In order to complete this, a qualified disclaimer statement has to be completed within nine months of the owner’s date of death.

Avoid penalties

It is also important to note that failure to take appropriate RMDs can result in strict penalties equal to 50% of the amount that should have been withdrawn. When multiple beneficiaries are involved in an inherited IRA, in addition to an IRA being left to an estate or trust, the distribution rules become more and more complex. In this case, I always recommend meeting with a tax or estate planning professional before making any specific decisions.

As always remember that your financial professional works for you, so if you ever have any questions, never hesitate to reach out to them.


Article Written By David Wentz

David Wentz is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.

Securities and investment advisory services offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Tax Favored Benefits, Inc. are not affiliated. Additional products and services may be available through David B. Wentz or Tax Favored Benefits, Inc. that are not offered through AIC. Securities email: dbw@taxfavoredbenefits.com

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