Are you expecting to inherit an IRA account from a parent or spouse? According to a recent article on the AARP website, there are some things you should know before you cash in the account.
The spouse inherits:
In the case of a husband or wife getting the IRA when the spouse dies, the funds can be transferred to his or her account. Another alternative is to retitle the IRA. That involves having the account retitled as “Bill Smith IRA (deceased Aug. 1, 2012) for the benefit of Lisa Smith, beneficiary.” Only then, can Lisa start taking money, penalty-free. Yet, once Lisa turns 59½ , she has to retitle the account in her name. Doing that allows her to defer withdrawals until she turns 70½.
An adult child inherits
If you are going to receive an IRA from a parent, please note that you can’t roll it over to your IRA and if you cash out right away, you’ll have to pay taxes. If that isn’t bad enough, you’ll also lose tax-deferred savings if the IRA in question is a traditional one. As with spousal inheritance, the best thing to do is to retitle. If the money will be split among heirs, then each person should retitle to avoid tax liability. Yet unlike a spousal inheritance, an adult child is required to make a minimum withdrawal. While the withdrawals are taxed, what remains in the account accumulates income tax-deferred.
If you are going to leave an IRA to a spouse or adult child, it is also important to keep contribution records in order to reduce your tax liability. Saving tax returns or at least the page that lists what was contributed to the IRA account helps. After all, you don’t want to go through all the trouble of saving for and bequeathing your IRA to your heirs, only to burden them with more taxes than they need to pay.
To sum up, if you want the benefits of an IRA without having the tax burden, make sure that you retitle any inherited IRA that you receive. Retitling also works for 401K’s, so do that if you inherit a 401K. If you are thinking of passing on an IRA or 401Kto a spouse or child, be sure to leave written instructions in your will and other estate documents that the tax-deferred account in question is to be retitled. If you want your money to go to its intended recipients, consult with an expert and have everything put in writing. That way, few things are left to chance or the state.