Generally speaking, receiving an inheritance is a good thing for most people. Even when it is a retirement account, the amount can be a handsome windfall.
Right now, you have a exceptional opportunity to continue a tax deferred investment for your own retirement fund. With this strategy, the rate of the inheritance will be able to increase over time. This is definitely good news when most people are anxious about having enough money to be able to live on when they retire.
However, if you are not aware of the IRS regulations, you might need to pay a significant amount of the inherited IRA minimum distribution in penalties and taxes.
The major problem with understanding the inherited IRA minimum distribution rules is that for the average person, the descriptions are not always easy to decipher. You would have better luck finding a needle in the Black Forest.
Additionally, the tax implications of inherited IRAs are up-to-the-minute because traditional IRAs are also fairly young and people have only begun receiving these funds as an inheritance in the past few years. The tax laws have to catch up to the traditional IRAs as well as the Roth IRAs that you can possibly inherit.
There are two essential types of inherited IRA minimum distribution scenarios: spousal inheritances and non-spousal inheritances.
With a spousal inheritance, the rules are somewhat simple due to special privileges that are available when you get married. There are several options which are applicable to avoiding any kinds of penalties and taxes.
You can turn over the money into your existing IRA account, or even choose to open a new one. If you are younger than 59 and a half years old, you will be able to remain a beneficiary on the account. Your deceased spouse’s name will also remain on the account, which will enable you with access to some of the funds and avoid the 10 percent early withdrawal penalty.
An inherited IRA minimum distribution is handled completely differently when you receive the account from someone other than your spouse. First, try to ensure that you are identified as a designated beneficiary by your loved one, rather than by simply applying the label of “my estate” or “my living trust”.
Another mistake is assuming that leaving the IRA beneficiary space blank will automatically deal out the funds as part of the will. When an IRA is transferred to a trust or estate, that taxes will need to be paid within five years. Being a designated beneficiary affords you you more choices for how withdrawals are handled, and will minimize your tax burden to the IRS.
The bottom line is that you want to handle an inherited IRA wisely. You are not trying to avoid paying taxes; as you simply do not want to pay more than you have to because of faulty information. Talk to a financial planning and tax advisers in order to receive the proper guidance.
Steven Marks is a contributing editor at DebtFinanceArticles.com. This article may be reproduced provided that its complete content, links and author byline are kept intact and unchanged. No additional links permitted. Hyperlinks and/or URLs must remain both human clickable and search engine spiderable.