Hazards to Avoid when Inheriting an IRA

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

One problem is failing to take required minimum distributions. Required minimum distributions must be taken by owners of traditional IRAs when they turn 70 ½ . Nonspouse beneficiaries must start taking required minimum distributions the year following the year the owner died if they want to stretch the IRA over their own life expectancies. These beneficiaries will owe tax on distributions of deductible contributions and earnings from the traditional IRA.

Nonspouse beneficiaries of Roth IRAs must take required minimum distributions. However, withdrawals from an inherited Roth IRA are tax free.

There is a 50% penalty for a nonspouse beneficiary of a traditional IRA who misses a withdrawal for that year. The penalty can be avoided if the account is completely depleted within five years of the owner’s death provided the owner died before he had to start required minimum distributions.

As is pointed out by Twila Slesnick in her book titled IRAs, 401(k)s & Other Retirement Plans, “However, depending on the size of the IRA and the age of the beneficiary, it might be smarter to pay the penalty than to liquidate the account simply to avoid the penalty.”

Consult your estate planning attorney for further information.