Hopefully my clients will be well prepared when an unfortunate but inevitable death occurs within a family.  When dealing with inherited IRA’s, there are distribution and tax implications.  If one makes a mistake in this area of finance, this could trigger a huge current tax bill as well as the loss of tax deferred growth from the IRA investment vehicle.
Inheriting Traditional IRA’s:  If you are a spouse and you are the beneficiary of a traditional IRA, you are allowed to roll the IRA account into your name and you are not required to take any money out of the account until April 1 of the year following when you turn 70 ½ years of age.  This will allow you to continue to grow the account and pay no current tax.
If you are a non-spouse beneficiary, the rules are different.  You can choose to systematically withdraw the account over a 5 year period, or choose to do it over your life expectancy, often a time period far longer than 5 years.  Once the distributions start (in the year following the year the participant passed away), tax is paid at the ordinary income tax rate, not the capital gains rate, even though the account may have increased in value over time.
Both Spouse and Non-Spouse beneficiaries must very careful here, as failure to take any required minimum out of these inherited accounts will lead to a 50% penalty on the amount that should have been withdrawn.  It is also very important to title the new accounts correctly.  The inherited IRA cannot be combined with any other IRA accounts for the non-spouse beneficiary, and it must be properly and separately titled.  Please make sure to pick new beneficiaries in the new account.
Please be sure to split the IRA appropriately after the date of death.  Many IRA accounts have multiple beneficiaries of varying ages.  If the account is not split properly, than the required distributions will be based on the oldest age of the beneficiary, and the youngest beneficiary may end up losing many years of tax deferred growth and be required to withdraw the account over five years.
Inheriting Roth IRA’s:  A spouse who inherits a Roth IRA does not have to withdraw from the account ever.  Even after age 70 ½.  A non-spouse beneficiary must withdraw from the account, but the withdrawal is not taxable from Roth IRAs.
The IRA rules are far more complicated than mentioned here, and it is important to be very proactive in this area and get the competent financial advice you deserve.  Listen below to a podcast on inherited IRA’s from radio WNBP FM 106.1 with Win Damon.

Stuart Steinberg of Eaglerock Financial, Inc. has worked with families for more than 20 years, helping them work toward their financial goals through a holistic, well rounded approach rooted in objectivity, education, and empowerment. Stu is highly regarded by clients and colleagues for his unique combination of investment, CPA and entrepreneurial experience in the high net worth market.