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Difficulties You May Have After Inheriting IRA As A Non-Spouse

Inheriting an Individual Retirement Account (IRA) is not easy if you aren't the spouse of the deceased person. The actual inheritance is not difficult, but there are legal hurdles, requirements and rules that you have to follow. Failure to follow these regulations may attract potential tax penalties and even delay your receipt of the funds. For example, you:

Need to be Careful with Year of Death Distribution

There is a minimum amount of money, known as the required minimum distribution (RMD), which every account holder above the age of 70½ is supposed to take out every year. If your loved one dies before taking his or her RMD for the year, then you are supposed to take it before the end of the year.

There are three potential problems with this requirement:

  • You may not know about it
  • You may not know whether the deceased had taken out the RMD or not
  • The death may occur towards the end of the year and leave you no time for the processing (after all, you will be preoccupied with the funeral arrangements and dealing with your loss)

If you fail to make the withdrawal, then you lose half of the RMD.

Have To Take Them Out At Some Point

You can't leave the inherited money in the IRA account forever, that option is only available to some spouses. As a non-spouse, you have to take it all out eventually. This means you forfeit the benefits of an IRA account such as no taxation for capital gains, dividends and distributions.

If you want to enjoy these benefits, then opt to take the distributions over your life expectancy. Otherwise, liquidate the account within five years and suffer the associated tax bill. It's not like other forms of investment that you can pass on to your descendants endlessly.

You Need To Act Fast

Lastly, you should evaluate your options and decide on what to do with your inherited IRA as soon as you receive it. Do you want to go the stretch way (take out annual distributions based on your life expectancy) or liquidate the account? This is not a decision you can make at whim; if you don't take the first distribution by the end of the next year (after the demise of the account holder), then you are automatically designated to take it all out by the end of five years.

As you can see, inherited IRA can be pretty complicated. This is why you need to act fast and hire an attorney (such as Joanna Cobleigh Esq) to help you handle it as soon as possible. Ignorance is not a defense here, and the IRS will come after you hard if you make a mistake.