Inherited IRA Planning Decisions Part Two

Recently I posted about some options you might have if you inherit an IRA or benefit from an employee sponsored benefit plan.  As promised, here are a few additional options for you to consider.

If the IRA owner or plan participant died before he or she began taking required minimum distributions, you can generally elect to distribute the entire interest in the IRA or plan within five years of the owner's or participant's death. (In this case, you don't have to begin taking distributions the year after death.)

If the IRA owner or plan participant died after beginning to take required minimum distributions, you may be able to spread distributions over the owner's or participant's remaining life expectancy (calculated in the year of death) but only if that period is longer than your own life expectancy.

Be careful, though, keep in mind that an employer-sponsored retirement plan can specify the distribution method that beneficiaries must use. If your choices are limited by a plan, you may have the ability to transfer the plan funds to an IRA established in the deceased IRA owner's or plan participant's name--the rules that apply to inherited IRAs would apply to the transferred funds.

Additionally, if you are a surviving spouse and a designated beneficiary of the IRA or plan, you can roll over inherited traditional IRA or plan funds into your own traditional IRA or retirement plan. If you're the sole beneficiary you can also leave the funds in an inherited IRA and treat it as your own IRA. In either case you can then name beneficiaries of your choice and defer taking distributions until the required age (usually 70½).

You can generally also roll over ("convert") non-Roth distributions from an employer plan into a Roth IRA (you'll generally pay tax upon the "conversion" but qualified distributions from the Roth IRA will be tax free).

In my next and final post on this topic, I will cover points to consider if you’re a non-spouse beneficiary, with rollovers, and special considerations you may need to make when you inherit a Roth IRA.

The rules governing inherited IRAs and employer-sponsored plan accounts are complex.  Consult a tax advisor for more information. Neither Blaine Bowers nor the Strategic Financial Alliance provide tax or legal advice.