When you open an individual retirement account, also known as an IRA, it is supposed to help you save for your golden years. After all, an IRA gives you the opportunity to grow your savings until you retire or reach the age of 59 ½. However, in some cases, the funds in your IRA may outlast you. When an IRA owner passes before all of the funds have been depleted, the remaining balance is passed to their designated account beneficiary. Should this happen, the beneficiary has a few options they should consider.
Open an Inherited IRA
The first option is an inherited IRA. This account will allow you to distribute the funds, although they will be taxed. (Withdrawals from an inherited IRA account are subject to your normal income tax rate.) When you open an inherited IRA account, you will have a required minimum of withdrawals you must make. The balance of the inherited IRA account and your life expectancy determines this. If the original IRA owner passed before the age of 70 ½, you may delay withdrawals for up to five years.
Take a Lump Sum
If you would prefer to cash out the IRA account you inherited, you have that option as well. As with the inherited IRA account, a lump sum withdrawal will be taxed like your normal income would be. If the IRA has a large balance, it is important to realize that this may push you into a new tax bracket. With it will come higher tax rates.
Transfer the IRA
In the event that you inherit an IRA from your spouse, you have the option to transfer the balance into your own account. This is known as “assuming ownership.” Unlike the inherited IRA account, you are able to make withdrawals when you deem it necessary. As with a normal IRA, there are penalties if you withdraw funds prior to turning 59 ½. (Penalties are currently 10% for early withdrawals.)
The above options apply to traditional IRAs and Roth IRAs. There is one obvious difference however. Roth IRAs are opened with post-tax dollars. Because of this, they are typically not taxed. If you opt to take withdrawals from an IRA you inherited and are over the age of 59 ½, you can do so without owing any taxes. However, if you are under the age of 59 ½, you will need to pay an early penalty tax on any investment gains you withdrawal.
Royal Legal Solutions and Your Beneficiary
At Royal Legal Solutions, we make IRA account ownership easy. When you open an account with us, we strive to make it as painless as possible for you and your designated beneficiary. We understand the impact the loss of a loved one can have. Because of this, we do our best to provide your beneficiary with the same support, professional feedback, and quality account policies that we gave to you.