The October, 2010 issue of Financial Planning Magazine has an article “Checking It Twice” that discussed various aspects of inherited IRA’s. The article made me review certain details of my IRA and I think the information could be important to you. As with any tax advice, you should go to your personal tax advisor and determine how it may apply to your particular situation. Here are some of the highlights from this article. Beneficiary designations are important. Who the beneficiary designation form names as beneficiaries determines how quickly the money must be withdrawn. If people other than a spouse are named, distributions must begin by December 31st of the year after inheriting, but can be stretched out over their own life expectancies. This allows the bulk of the inheritance to retain tax deferred growth. If the estate is named as beneficiary, all funds must be withdrawn within five years, with an exception if the deceased was already 70 ½. Review your IRA beneficiary forms.
If the IRA owner was 70 ½ and has not taken the RMD, those funds must be withdrawn before doing anything else. Beneficiaries who don’t need or want the money can disclaim the inheritance. Their shares in the IRA can pass to the next person, trust or charity in line. The beneficiary does not decide where the “disclaimed” funds go; that is based on the beneficiary form filled out by the deceased owner of the IRA. If your IRA is not up to date with contingent beneficiaries listed, take note. Many company retirement plans require non-spouse beneficiaries to take the money out in a lump sum, usually within a year. Beneficiaries may be able to avoid that result by setting up an inherited IRA. The inherited IRA must be re-titled and should include the original owner’s name, indicating that it is inherited; i.e., “John Doe, deceased, inherited IRA for the benefit of John Doe, Jr., beneficiary”. When there are more than one beneficiary listed, ask the custodian to split the monies according to the beneficiary designation form. The deadline for subdividing is December 31st of the year following the year of the owner’s death.
A spouse who inherits an IRA has an option not available to other inheritors. Assuming the wife is the survivor, she can, of course, roll over the assets to her own IRA. If she is not 59 ½, any distributions she takes may have a 10% tax penalty. She should consider waiting to do the rollover after she reaches age 59 ½, since there is no requirement to take money out of the inherited IRA until the late spouse would have turned 70 ½. This gets a little complicated, which is a reminder to consult with your tax advisor before any action is taken. When one has an inherited IRA, they can designate who will be the recipient of the remaining funds at their death. The “new” beneficiary cannot stretch distributions over their life expectancy, but can take them over the prior beneficiary’s remaining life expectancy. Finally, if there is federal estate tax on the IRA owner’s estate, the beneficiary can take an itemized deduction for the portion of this estate tax attributable to the inherited IRA. The deduction can only be used to offset funds withdrawn from the inherited IRA in a given year. The deduction can be spread over future tax years until it is fully depleted.
Enough already! Christmas is on the way. I plan to celebrate the holiday with good friends and a house full of family. I have been blessed in so many ways, as have most of you. I pray that we include some of the less fortunate in our gift planning, sharing not only money, but also time and talents. I give thanks each morning for all I have been given, but most of all I thank God for loving me. As we exit this year and start a new one, let’s go forth in the world, “rejoicing in the power of the Spirit”. God’s peace to you. Happy Holidays.
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