Hazards to Avoid when Inheriting an IRA – Part 2

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.

Another problem is the fact that nonspouse beneficiaries cannot roll an inherited IRA into their own IRA. A new account must be established and its titling must indicate that is an account for a beneficiary. For example, the new account would be retitled as “John Smith (deceased January 1, 2015) IRA for the benefit of Susan Jones”.

Another problem is if there are several beneficiaries with wide ranging ages. These beneficiaries should split the IRA so that each beneficiary benefits from the IRA being stretched over his life expectancy. Otherwise, the life expectancy of the oldest beneficiary will be used to calculate the required minimum distribution which will decrease the number years that the money can grow tax deferred.

For example, if the beneficiaries are an 80-year-old brother, a 55-year-old-son and a 25-year-old grandchild and the account is not split, all of the beneficiaries will be required to calculate their required minimum distributions based on the 80-year-old’s life expectancy. But if the account is split by December 31 of the year following the year the owner dies, each beneficiary can use his own life expectancy to take required minimum distributions and can decide how the money is invested. The younger the beneficiary is, the smaller his required minimum distribution and the longer the money can grow tax deferred.

Consult your estate planning attorney for further information.