by Daniel Kittell | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual, Tax Preparation - Individual
You have several options when you inherit an IRA, so it’s no wonder that most people on the receiving end have questions about taking distributions, tax implications, and incorporating the inheritance into their existing financial plan. For starters, it helps to distinguish if you’ve inherited the IRA from a spouse or someone else.
For spousal beneficiaries, you can roll over the inherited IRA into your existing IRA and the earnings will continue to grow tax-deferred. You won’t have to start taking required minimum distributions (based on life expectancy) until you reach age 70 ½, but you’ll pay a 10% early-withdrawal penalty for funds you take from the account before age 59 ½.
Spousal beneficiaries are also entitled to any of the methods available to non-spousal beneficiaries, which include:
- Lump-sum payment: when you’re taking the money from an inherited traditional IRA, you won’t be charged a 10% early withdrawal penalty, even if you’re under age 59 ½, though you will still have to pay taxes on the money.
- Five-year distribution plan: there are no required minimum distributions, but all the money will need to be withdrawn from the account by the end of five years.
- Life expectancy method: if the original owner was older than the beneficiary, the beneficiary can use their own age and the IRS Single Life Expectancy Table to calculate how much they’re required to withdraw from the account each year (failure to take out the minimum requirement will result in a 50% penalty on the amount that was not withdrawn on time).
It’s important to note that non-spousal beneficiaries aren’t permitted to roll an inherited IRA into an existing IRA, and they must begin withdrawing assets no later than December 31 of the year after the account holder passed away.
Roth IRAs can usually be inherited tax-free, but you can’t keep the funds in the account forever. Non-spousal beneficiaries have to take annual distribution from the account based on their life expectancy (using IRS guidelines), starting the year after the original IRA owner dies, while spouses have the option of rolling a Roth IRA into their own account. Another option is to withdraw all of the money in the account within five years.
If you are in a similar situation and have questions about an inherited IRA, please feel free to contact me via email at [email protected].
by Jean Miller | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual
What, or who, is a “Millennial”? Numerous individuals who find themselves in this generation do not like the connotations the word ascribes, but if you were born in the 80s or 90s, then you fit into what most researchers would call the Millennial generation. Many at this stage of life think that they’ve just barely entered adulthood, but it’s never too early to start considering “adult” things like investing for your future. And for those at this age and stage of life, a Roth IRA may be just the investment to consider.
What exactly is a Roth IRA?
A Roth IRA is an Individual Retirement Account where you set aside after-tax income up to a set amount each year.
How is it different from a traditional IRA?
One major difference is that funds put into the account are after-tax income, meaning, when you withdraw money from a Roth, taxes have already been paid. In a traditional IRA, you are taxed when money is withdrawn from the account, however, funds placed in the account may be fully or partially deducted at the time of placement. Therefore, a traditional IRA may seem enticing to Millennials initially because of the deductions, but a Roth is more financially viable since you do not pay taxes later in life. And, more likely than not, you will be paying less taxes earlier in your career (due to lower income). Eventually, you could even reach a point where you make more than allowed to invest in a Roth (eligibility phases out at $118,00 for individuals and $186,000 for a household).
Another big reason why Millennials should consider a Roth, is that you are not taxed or penalized on money withdraw at any time, even if you haven’t retired yet. So, for example, if you have been trying to establish an emergency fund (as many advisors suggest you do), but your monthly bill and loan payments make it nearly unattainable to save three months worth of expenses and maintain it only for emergencies. Having a Roth, however, could essentially serve as both a retirement and emergency fund because, in a Roth IRA, you can withdraw money in an emergency without penalization. Can is the operative word here because while it is possible, removing funds from a Roth is certainly not advised if you are really trying to save for retirement. Nevertheless, the funds are more accessible if needed.
While investing in your future is advised no matter what sort of account, for a generation who leans toward early retirement, but is less likely to have a 401(k) (due to being self-employed or working for a start-up/small business that does not offer one), a Roth IRA may be the best long-term alternative.
