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Articles: Inheriting an IRA? Weigh Your Options

At some point, perhaps in the near future, you may inherit an IRA from your spouse or another relative. The rules for inherited IRAs can be confusing, especially since you’re likely to be emotional over the passing of a loved one. Take a deep breath and consider the options.

For simplicity, this discussion will be divided into two sections: one for spousal beneficiaries and the other for non-spousal beneficiaries. Spousal beneficiaries generally have more flexibility than nonspousal beneficiaries.

Spousal beneficiaries: Assuming you are the sole beneficiary of a traditional IRA, you may choose to treat your spouse’s IRA as your own. This means you can contribute to the IRA if you have compensation. Furthermore, if you’re under age 70-1/2, you don’t have to take required minimum distributions (RMDs). Note: RMDs are generally required after reaching age 70-1/2. This requirement for IRAs was temporarily suspended, but only for the 2009 tax year.

Alternatively, you may leave the IRA in your spouse’s name, with you as the beneficiary. If your deceased spouse died after age 70-1/2, you generally must base subsequent RMDs on the longer of your life expectancy or the deceased’s life expectancy. Otherwise, distributions may be based on your single life expectancy, or the account must be emptied out in five years.

Another possible option is to roll over the inherited IRA assets into your own IRA. The rollover is exempt from current tax liability if completed within 60 days. Best approach: Use a “trustee-to-trustee” transfer to avoid tax withholding on the distribution.

Nonspousal beneficiaries: If you have inherited an IRA from someone other than a spouse, you cannot treat the IRA as your own. Thus, you are neither permitted to make subsequent contributions to the inherited IRA, nor can you roll over the funds to your own IRA. However, you can still arrange a trustee-to-trustee transfer to another IRA maintained in the name of the deceased IRA owner. In this case, you must begin taking RMDs subject to the rules that apply to IRA beneficiaries. (Remember the temporary suspension of RMDs for the 2009 tax year.)

Note that distributions from an inherited IRA are taxed at ordinary income rates. (The maximum tax rate for 2010 is 35 percent.) If you fail to take an RMD, you must pay a penalty tax equal to 50 percent of the required amount of the distribution.

Be aware that this article only summarizes the main rules when you are the sole beneficiary. Other rules may apply when a Roth IRA is inherited. Finally, it is important that each IRA account be properly titled. Consult with a financial professional concerning your particular circumstances.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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