When family members think about what assets they may receive after a loved one has passed away, they often think about physical property or sentimental objects. However, another common inheritance is an individual retirement account or an IRA. An IRA allows an individual to save money for retirement with tax advantages. There are strict rules regarding an IRA and how a beneficiary can use it. Because of this, beneficiaries may be confused about how to manage their new IRA and the specificities surrounding the account. Below are common questions and explanations about IRAs and retirement planning.
What is an IRA?
An IRA (individual retirement account) is a financial account set up for individuals to save for retirement. IRAs are either tax-free or are set up on a tax-deferred basis. There are also different types of IRAs, including a traditional and Roth IRA. The major distinction between these two IRAs is the timing of the tax advantages. Traditional IRAs allow individuals to make contributions now and the earnings are tax-deferred until the money is withdrawn. On the other hand, with Roth IRAs, individuals make contributions with money they have already paid taxes on—therefore, the money will grow tax-free.
I Inherited an IRA: What Do I Do?
After being left an IRA, people should first determine if it is a traditional or Roth IRA. Traditional IRAs require the owners to take minimum withdrawals by the age of 72; therefore, if the initial owner was older than 72, the beneficiary must make the required minimum withdrawal now.
If the beneficiary is not the spouse of the original IRA owner, there are very strict requirements to follow. The SECURE Act of 2019 requires non-spouse heirs to withdraw the funds from the IRA within ten years of the original owner’s death. This requirement applies for both traditional and Roth IRAs. One exemption for this rule is if the heir is more than a decade younger than the original account owner; then, they do not need to disburse the funds within the ten-year period.
On the other hand, if the beneficiary is a spouse, they have more options for how to manage the account. Spouses can transfer the assets from the account into an inherited IRA. This allows the spouse to withdraw the funds—either by taking annual distributions based on the heir’s own life expectancy or by withdrawing all the funds within a decade. The former option is called a stretch IRA because it “stretches” out the distributions for potentially decades.
Because there are financial penalties if an individual fails to properly handle an inherited IRA properly, Texans who have been gifted an IRA should reach out to an experienced estate planning attorney.
Contact a Houston Estate Planning Attorney
If you or a loved one has inherited an original or Roth IRA, contact the estate planning attorneys at McCulloch & Miller, PLLC. Managing inherited assets after a loved one’s passing can be difficult, so we are here to advise you and give you peace of mind during a stressful time. We have decades of experience drafting wills, planning for retirement, and managing inheritances. Call us today at 713-333-8900 to schedule a free, no-commitment consultation with one of our Houston estate planning attorneys.