The goal of all tax-deferred retirement accounts is to grow a large portion of your assets. This will allow you 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). Each of these accounts has the potential to become an inherited IRA.
How Do I Get an Inherited IRA?
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 of their retirement investments to a beneficiary(s). This usually happens in cases where an individual already has 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. That’s a major 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. Or, otherwise known as a beneficiary IRA.
Common Questions About the Inherited 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?
What You’ll Need to Know About Your Beneficiary 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. Even worse, they 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. For those who inherit funds from a tax-advantaged account, this information will help you know where you stand.
Safeguard Your Wishes With an Estate Plan
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 IRA Part II – How Do They Work?. In the meantime, would you like to book a no-charge, 15-minute strategy session with a fiduciary financial advisor? We will review your estate plan and ensure it’s setup according to your wishes. Just click the button below.
