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IRA-Based Advice on Tax Planning in Brainerd, MN

It may seem like a blessing to inherit an IRA, but there can be serious tax implications if you do not exercise caution. If your inheritance includes an IRA, you should ask a financial advisor or attorney with Brainerd Law about your options.

Naming your Spouse as a Beneficiary

If you inherit an IRA from your husband or wife, you can treat it as you would your own by putting it in your name, or by rolling it into a new individual retirement account. The IRS treats them as if they’ve always been in your name. If you haven’t reached the age of 70 1/2, you can wait until then to take minimum withdrawals. You can choose to leave the account in the name of your spouse, but you won’t be able to take withdrawals until they would have turned 70 1/2, or a year after their death.

Naming a Non-Spousal Beneficiary

The rules for a non-spousal beneficiary inheriting an IRA are different than those for spouses. You can elect to take lifetime distributions and pass the remainder on to your descendants, and distributions are based on life expectancy. This option allows you to grow the money on a tax-deferred basis, but you must retitle it as an inherited IRA and take a distribution by Dec. 31 of the year after the decedent’s passing. If you don’t want to ‘stretch’ the IRA, you’ll have to use the “five year rule” and drain the account within five years of the originator’s death.

Naming a Trust as a Beneficiary

If the inherited IRA has a trust as a beneficiary, that trust may not be able to stretch withdrawals over the course of years. A trust can still stretch an IRA if it chooses, if it’s a conduit or ‘see through’ trust. If you’ve inherited a trust-held IRA, consult a tax planning attorney to learn your choices.

Estate Taxes

If the estate of the deceased is subject to estate taxes, an IRA beneficiary might be able to take a tax deduction for all estate taxes paid on the individual retirement account. An attorney handling Tax Planning in Brainerd, MN can steer you in the right direction.

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