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April 28, 2015

Understand the Ins and Outs of an Inherited IRA

Bringing unique tax issues to surviving spouses, Inherited IRA’s provide the surviving spouse with various options as to treatment of the account. First, he or she can remain the beneficiary of the account. Instead, assuming the spouse is the sole beneficiary, he or she can treat the IRA as his or her own. Alternatively, if numerous beneficiaries exist, the account can be split up so the spouse’s portion becomes its own account. If a spouse chooses this option, the IRA will then be titled in his or her name and he or she will have the right to name new beneficiaries.

Be wary though, there are requirements that must be fulfilled to avoid IRS penalties. If the spouse has not reached age 59 ½ yet, withdrawing from the account will result in a 10 percent penalty. In addition, required minimum distributions (RMD’s) must be taken by the spouse by April 1 of the year after he or she turns 70 ½. RMD calculations can be difficult to calculate and the penalties harsh, but that’s why we’re here!

Inherited IRA’s require beneficiaries to meet the requirements of some very particular, constantly evolving tax rules. It is important to communicate the recent Supreme Court decision of Clark vs. Rameker, where the Court ruled that funds held in inherited IRA’s do not meet the definition of “retirement funds” for bankruptcy protection. It was declared that the funds held in inherited IRA’s are essentially “freely consumable” by the beneficiary, and as a result should be available to the creditors of the beneficiary as well. Therefore, inherited IRA’s will no longer be protected in bankruptcy.

In order to protect these funds from creditors, a surviving spouse should roll the IRA into their own account (as mentioned above). With regard to non-spousal beneficiaries, an alternative is to have the original owner of the account name a trust, rather than a person, as the beneficiary. But once again, these approaches are governed by complex rules so don’t do this without help from an expert.

Let your Anders advisor help you figure out the most advantageous way to handle your inherited IRA.

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