If you inherit a traditional individual retirement account (IRA), you also may inherit a large income-tax burden. How you choose to receive the money will be a
big factor. If you don’t need the money right away, there are ways you can defer or spread out the tax burden.
When You Are the Surviving Spouse
If you are the deceased IRA owner’s surviving spouse and beneficiary, you have several ways to defer income taxes on the money. One way is to roll over the inherited IRA into your own new or existing IRA. A rollover allows the assets to continue to grow tax deferred until you reach age 70½. Then, annual IRA withdrawals become mandatory.
When You Are Not the Surviving Spouse
The IRA distribution rules differ when you aren’t the spouse. But you can still spread out the tax burden. One option may be for you to receive annual distributions from the IRA based on your life expectancy. This will spread out the distributions — and the taxes — over a number of years. The younger you are, the longer you can stretch out the payments, and the longer the money can stay in the account and benefit from potential tax-deferred growth. This particular option is not available if the account had no designated beneficiary.
Inherited IRAs are subject to potential risks, such as tax law changes and the impact of inflation.
Give us a call before you make any moves, so we can help you determine the right course of action for you.