Mind the Details with Inherited IRAs

401K 2

Let's say that someone who is not your spouse recently died and named you as their IRA beneficiary. You now have what the IRS calls an “inherited IRA.”

When you inherit money, once you receive it you can usually decide where it goes from there, such as a simple deposit in savings. When you inherit an IRA, it’s a whole different ball game. And any mistakes will be punished by the IRS. When handling IRA money, make sure you mind the details of the transfer.

The Slott Report considered this matter in a recent article titled “Moving Inherited IRA Money? Be Careful.” If you inherit non-IRA money, plain and simple, then you could stick it in any bank account or investment and be done with it. Unfortunately, there are extra steps to consider when moving inherited IRAs.

For starters, you cannot move an inherited IRA into your own IRA if you are a non-spouse beneficiary. What if the financial institution where the account is held charges too much or another institution has better investment options? How do you move the inherited non-spousal IRA? The direct approach, naturally.

In a direct IRA transfer the first bank cuts the check to the second bank, for your “benefit” as beneficiary but NOT in your “name.” If the check is made payable to you, then it’s already too late. The tax deferral advantage of the IRA will be lost and taxes due. Moreover, in the transfer the receiving IRA has to be of the same kind of IRA (i.e., from a traditional IRA to traditional IRA, or from Roth to Roth).

Since there are many details associated with inherited IRAs, you should consult competent legal and tax counsel before you make a move. Otherwise, there can be some hefty taxes to pay at ordinary income tax rates.

To talk with an attorney about your estate planning needs, visit www.elderlawannarbor.com.

Reference: The Slott Report (March 5, 2013) “Moving Inherited IRA Money? Be Careful