Inheriting an IRA: Next Steps

Receiving an inheritance is often an affecting experience—marked by a loved one’s passing, the money is a wonderful gift that also gets intertwined in the grieving process.

It shouldn’t come as a surprise that receiving an inheritance involves much more than meets the eye. Today, we would like to take a look at how inheriting an IRA specifically works. 

Inheriting an IRA: Key Points to Know

An inherited IRA has several key points to consider. Let’s look at the timeline and rules for inheriting an IRA:

Immediately upon inheriting. Funds from the deceased’s IRA need to be transferred to a new “inherited IRA” in the beneficiary’s name. This needs to happen within 60 days of receiving the inherited account. 

Spouses who are inheriting. Spouses still have to move the funds from the deceased spouse’s IRA by assuming ownership of that IRA, opening a new “inherited IRA” account, or transferring the balance to their existing IRA upon inheriting. If the spouse is younger than 59 ½ and needs the funds, the inherited IRA should be considered and funds can be withdrawn at any time without penalty. Withdrawals can also begin the year of the decedent’s age 72 or 12/31 after the year of death, whichever is later. However, if combining IRAs, they have the flexibility to defer required minimum distributions (RMDs) until the surviving spouse’s age 72 if they so choose.

Non-spouses who are inheriting. There is much less flexibility for non-spouses inheriting an IRA. Funds cannot be transferred to an existing IRA. If they don’t wish to set up an inherited IRA in their name to hold the funds, they need to take a lump sum withdrawal to “cash-out” the deceased’s IRA, and pay applicable income taxes. All funds from the inherited IRA need to be distributed to the beneficiary within 10 years of inheritance. 

Was There An Estate Plan?

An inheritance can come in many forms, from a sum of money to property, stocks, and other assets that are passed down to family members after the owner passes away. But this is hardly a no-strings-attached type of present.

Inheritances often come with probate, lawyers, court, and sometimes even estate taxes. These and other moving pieces can be overwhelming especially if the loved one died unexpectedly without an updated estate plan—leaving the beneficiaries sorting through the court system for months or even years in some cases. 

Ideally, your loved one who passed away had an updated estate plan in place. With an updated plan, the process will run more smoothly, alleviating stress from the family members and loved ones. But, this is not always the case. Estate plans are complex and may require a great level of detail. One thing we see often is someone having an estate plan that is missing one or two minor details that need to be dealt with. 

Because of the ever-swinging pendulum of responsibilities, it is important to try and take it all in without letting yourself get overwhelmed. 

That is really easy to write, but it is much harder to actually do. Try to take the estate one step at a time and do your best to work with your family members to help get everything taken care of. Most times, though, it is important to enlist the help of a professional to ensure you aren’t missing a step or making an oversight that could have saved you both time and money. 

Ask For Help

While it is important not to rush through the process, staying vigilant will keep things on track. Working with a financial planner (in concert with your attorney) is a great step because they can review the estate plan, provide advice for moving forward, and lend an ear during this tough transition. Settling estates is a complex process, therefore, it is important to seek proper legal advice before making any decisions. 

If you delay the process too long, you may find yourself spending a lot more time and money to get it back on track.

We see this happen a lot but one example is with inherited IRAs or family property. Sometimes people simply cash out the IRA, even if that isn’t the most tax-efficient strategy, or the beneficiaries will let a house sit vacant without considering the cost to keep and maintain the property.

If you have recently inherited an IRA, or have received any form of inheritance, we can help you put a strategy together to navigate this new territory. There may be complex decisions to make during this season of life, and working with a financial planner can help you to make savvy financial moves in the context of your holistic financial plan. Want to learn more? Get in touch with us today by clicking here.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education, and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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