Tax Planning for Inherited IRAs

Chris Bibey
by Chris Bibey

 

Do you know anything about inheriting an IRA? If this is something that you will be faced with in the near future, it is important to know what you will be up against and how you can make decisions that will benefit you when dealing with inheritance tax. Tax planning for inherited IRAs is easy enough if you know which steps to take.

Here are several inheritance tax tips that can help you determine what to do next:

Inheritance Tax Tip #1

Don’t make any quick decisions. If you inherit an IRA, do not do anything until you know the rules and potential inheritance tax that governs your situation. For instance, did you know that you have to re-title the IRA unless you inherited it from a spouse? Anything you do before this will make your inheritance tax situation more confusing.

Inheritance Tax Tip #2

When you open your IRA, make sure you are smart about who you list as the beneficiary. This may not help you after you are gone, but it is definitely a big deal to those you leave behind. If somebody other than a spouse is the heir, they must begin to take distributions by December 31 of the same year. That being said, they can draw money over the long term to ensure years of income free growth.

For flexibility purposes, name both a primary and alternate beneficiary. For instance, your spouse could be the primary beneficiary and your children the alternate. With this, the primary beneficiary can turn down the account which then passes it on to the alternate beneficiary along with the inheritance tax benefits.

All of the above will also have an effect on the amount of inheritance tax that your beneficiary will be required to pay.

Inheritance Tax Tip #3

A spouse is in the best position in terms of withdrawals and avoiding inheritance tax. A spouse can roll an inherited IRA into his or her own IRA and in turn postpone distributions until turning 70.5. That being said, like other IRA owners, the spouse may have to pay a 10 percent withdrawal penalty should they want to access the money in their own IRA before 59.5. To protect against this, it makes most sense to wait until after becoming 59.5 to rollover the funds.

* * * *

Tax planning for inherited IRAs starts early. The person who owns the IRA should consider the inheritance tax implications to their beneficiary. Along with this, once you inherit an IRA there are several things you can do to better your tax situation and ensure that you get to keep as much money as possible.

With this advice, planning for inheritance tax on an IRA should be less stressful.