I’m a Financial Advisor: Here Are 5 Things You Should Do If You Inherit an IRA
Written by
Gabrielle Olya
Edited by
Gary Dudak
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If you inherit any form of wealth, it’s important to understand the tax implications as well as the best ways to lower any possible tax burdens. This is particularly true when it comes to inheriting an individual retirement account (IRA).
GOBankingRates spoke with Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, about what you should do if you inherit an IRA.
Familiarize Yourself With the Relevant Rules and Regulations
“There have been a myriad of rule changes in the past few years that have made major changes to the tax code,” Chisholm said.
The two he recommends paying particular attention to are IRS Notice 2023-54 and the SECURE Act.
“IRS Notice 2023-54 provides relief for non-eligible designated beneficiaries who inherited retirement accounts,” he said.
Meanwhile, the SECURE Act mandates that beneficiaries of a person who died prior to 2020 can adhere to the old rules, which can be more favorable to beneficiaries.
Don’t Take a Lump Sum Payout
“Until recently, you were allowed to extend the [required minimum distributions] (RMDs) from an inherited IRA out based on your lifespan. Now, you are required to take it out before the end of 10 years,” Chisholm said. “This can significantly reduce the opportunities for tax planning strategies.”
However, one of the best ways to reduce taxes on an inherited IRA is to opt out of taking a lump sum.
“If this comes from a spouse, wait until RMDs begin before taking them,” he recommended. “For a non-spouse, it would be best to align the distributions with your expected income for the next 10 years. Either space it out, or try to find years where you are earning less than normal to take the distributions.”
Liquidate Any Illiquid Assets as Soon as Possible
“If the account holds an illiquid asset, start planning on trying to liquidate the asset well before the end of the 10-year period, if possible,” Chisholm said. “Otherwise, it can complicate the distributions.”
Move Distributions Into a Traditional Retirement Account
The best place to put any distributions from an inherited IRA is a traditional retirement account, according to Chisholm.
“Use this extra money to contribute to a traditional retirement account to help reduce your taxable income,” he said.
Don’t Put Off Making a Plan
The worst thing you can do when you inherit an IRA is nothing at all.
“Take control of your inherited IRA — don’t let it control you,” Chisholm said. “Many people put off planning until the last minute, which could cost you dearly.”
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