The goal of all tax-deferred retirement accounts is to grow a large portion of your assets so as to be able to (partially) rely on these funds when you finally stop pulling in a paycheck. Common types of retirement accounts include the ubiquitous 401(k), 403(b)s for healthcare, academia, and government workers, the Solo 401(k) for self-employed individuals, and the IRA (Individual Retirement Account).
Sadly, tragedies happen and life so often doesn’t play along with our goals. An unfortunate and all-to-common occurrence is when an individual passes away before they can use all or any of those funds they worked hard to save for their retirement years. Or, in less somber situations, perhaps the individual set up the retirement account with the intent of passing some or all of those funds to a beneficiary(s), having enough assets to otherwise rely on in their retirement years.
In either case, these situations make for a difficult transition. It’s one of which we confront time and again as we serve our clients. In fact, this transition is one that we seek to confront even before it occurs as part of the estate planning component of our service. We want to make sure that in the event of their passing, the wishes of those we work with are being honored as it relates to their assets.
One aspect of this always involves ensuring beneficiaries are named on their retirement accounts. In the event of a retirement account owner’s passing, this often ends up with the creation of an inherited IRA, also known as a beneficiary IRA. In the event of the creation of an inherited IRA, this also ends up with a lot of questions. Here are a few of the common ones we’re often addressing:
- What are the tax implications when I inherit an IRA?
- Can I rollover the money into my existing IRA?
- How do I withdraw funds from my inherited IRA?
- Should I withdraw funds from my inherited IRA?
The reality is that the answers to all of the above questions will depend of what type of beneficiary you are and what type of account you’re inheriting. Learning that first and then getting the answers to these questions is crucial to ensuring that you’re fully benefiting from this type of account. Used correctly, an inherited IRA allows a beneficiary to continue benefiting from pre-tax (tax-advantaged) growth. Used incorrectly, a beneficiary could lose out on some of the growth potential of this inheritance or could face unwanted tax implications or penalties in the future.
Next week we’ll answer those questions and more. This will benefit you if you’re estate planning so that you’ll have a better idea of how to transfer your wealth in accord with your wishes, or, if you’ve inherited funds from a tax-advantaged account, you’ll know where you stand.
We hope this gives you an easy-to-understand breakdown of what an inherited IRA is and how its utility comes to being. Be sure to come back next week for Inherited IRAs Part II. In the meantime, if you’d like to book a no-charge, 15-minute strategy session with one of our advisors to review your estate plan and ensure it’s setup according to your wishes, go ahead and click the button below.
