Perspectives

The Great Wealth Transfer Is Here

Prepared by David LeCompte Bridgeworth News

According to a recent article in Investment News, approximately $26 trillion dollars will be transferred from one generation to the next in the coming decades. There is a good chance that you will need to know the rules for inheriting an IRA. Failure to understand the rules can cost you excess taxes and loss of tax deferred growth.

It is important to understand:

  • All distributions from an Inherited IRA are taxable at your tax rate the year in which you withdraw any money.
  • Distributions from an Inherited IRA are not subject to the 10% early withdrawal penalty for those under 59.5 years of age.
  • Account Titling: If you decide to open an Inherited IRA, you will not be able to treat it as your own. You will need to title the new account in a manner that identifies it as an IRA with respect to the deceased and identifies the beneficiary. For example, John Smith, IRA FBO John Smith, Junior, beneficiary.

There are several options from which to choose based on the original account holder’s age.

If the account holder was under age 70.5, the following choices are available:

Open an inherited IRA and use the Life Expectancy Method. You must begin taking annual distributions no later than 12/31 of the year after the account holder dies. This strategy allows you to stretch out the tax impact over your lifetime and it takes advantage of tax deferred growth. If you fail to begin taking annual distributions by 12/31 following the account holder’s death, then you will be forced to liquidate the account over five years.

  • Always use a trustee to trustee transfer when moving money to your Inherited IRA. Have the transferring financial institution make the check payable to the new financial institution. Do not have the transferring financial institution make the check out to you as this will make the entire balance taxable immediately.
  • Failure to take the required distribution on time will result in a 50% penalty of the RMD amount.

Open an inherited IRA and use the five year method which means the account must be fully liquidated by 12/31 of the fifth year following the account holder’s death.

Withdraw the full account balance in a lump sum distribution. The entire account balance will be taxed.

If the account holder was over 70.5, the following choices are available:

Open an inherited IRA and use the life expectancy method.

  • Note: If the original account holder did not take a RMD in the year of death, a RMD must be taken from the account by 12/31 of the year the account holder died.
  • Withdraw the full account balance in a lump sum distribution.

Please meet with your financial planner or accountant to determine the tax impact of any decision.

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