The Livens Law Firm

Financial and tax options for an IRA inheritance

What happens when a person passes away and leaves an IRA to someone other than a spouse? A spouse who receives an IRA inheritance has the most flexibility and can treat the account as his or her own. Others will find that their options are limited, and making the wrong decision can have expensive financial consequences. In Texas and other states, four options are available for the beneficiaries of inherited IRA accounts.

Custodians or representatives often suggest cashing the account in. Some beneficiaries are unaware that options exist beyond full cash out of an IRA, but banks rarely offer other alternatives. Other options would be to spread the distributions out over five years. The money can be dispersed in installments or all at once at the end of the five-year term and are taxable upon withdrawal.

If the original owner was 70 ½ and was receiving required minimum distribution payments, the beneficiary may take the RMD installment amount. An RMD can be calculated and dispersed over his or her life expectancy. This option is also taxable, but the balance will continue to grow on a tax-deferred basis. Final decisions regarding IRA distributions must be rendered by the end of the year of the owner's death. If a choice is not made by then, the account may default to a five-year payout.

Receiving an IRA inheritance is a wonderful gift, but the tax consequences can be overwhelming. In Texas, it may be beneficial to consult with an attorney who is knowledgeable about estate planning, including IRA distributions. Knowing what options are available and making the best financial decisions now can ease tax complications later on.

Source: pe.com, "Inherited IRAs: 4 options for non-spouse beneficiaries", Tami Sipos, March 24, 2018

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