Retirement Eggs

Welcome to the final in the three part series on “Retirement Accounts Made Easy!”

If you missed Parts One and/or Two, you may read the blogs posted on August 18th with Part 2 posted on August 24th.

I look forward to hearing your thoughts and questions.

 


*** PART THREE ***

Inherited Accounts

Contributions: Generally, you can’t contribute to an account you inherit.  The exception is an account owned by the spouse of the deceased, if that spouse retitles the account in her or his own name.

RMDs: The rules can get complicated, depending on whether you were the spouse of the deceased and whether the deceased was in the process of taking required minimum distributions before he or she died.  But generally, beneficiaries of inherited retirement accounts have three options:

  1. Transfer the assets to their own IRA: This option is only available to the spouse of the deceased.  Once the assets are in the spouse’s account, RMDs and early withdrawal penalties (if any) will be determined by the spouse’s age.
  2. Empty the account within five years: No withdrawals are required in any given year as long as all the assets are distributed within five years of the benefactor’s death.  The distributions will be exempt from the 10% early withdrawal penalty normally applied to distributions made before age 59 1/2.
  3. Stretch the account over the beneficiary’s lifetime: Take RMDs each and every year, starting the year after the benefactor’s death.  While this option would require the beneficiary to begin taking money sooner than the five-year option, the rest of the account can be left to grow for decades.  But it does mean that any beneficiary, of any age, must take an annual RMD.  Even a 1-year-old baby who inherited an IRA from her grandmother would need to take a required distribution each year the account has money in it.  This would be the case even if it’s a Roth IRA.  Fortunately, these RMDs are also exempt from the 10% early withdrawal penalty.

Note that the third option is available only to named beneficiaries of an account.  If the account didn’t have named beneficiaries, or they had already passed away, the account then goes into the overall estate.  Anyone who then inherits the account must liquidate it within five years, which could result in a large tax bill and the loss of future tax-advantaged growth; the option to “stretch” the account over a beneficiary’s life has been lost.  This is why it’s important to name specific people as the primary and backup beneficiaries of your retirement accounts, and to keep that information updated.

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