When Can I Withdraw a Money Inheritance IRA?
- Once you find out you are the heir to an IRA, call the IRA custodian at the number located on the statement; ask what paperwork is involved to take a distribution, and what other options are available to you. Most custodians only require a death benefits form, proper identification and an original death certificate to initiate the death benefits payment. However, before you make your benefits claim, look at the big picture. The more you take out of the IRA, the more income taxes you owe, at least on a traditional IRA account. If the account is a Roth, the more you take out, the more you sacrifice in tax-free growth. If possible, speak with the estate trustee, if you are not that person, and a tax adviser to review all tax issues before making an irrevocable election.
- Who you are in relation to the deceased will affect your options. Entities named as the beneficiary can only take a lump-sum distribution; such entities include a family trust, a charity or "the estate." Living persons such as a spouse, child or family friend can use the lump-sum distribution, but can also spread it over five years. These individuals can also choose a beneficiary IRA, which rolls the inherited IRA into a new one using the deceased's information, but taking annual distributions based on the heir's age. A surviving spouse has one other option, which is to continue the IRA as if it were her own, even commingling the money with other contributions and IRA assets.
- If you don't need the money, don't take it out. That might seem like common sense, but lump-sum distributions are frequently taken and thrown into a savings account. Think about what really happens when you do this. If it is a traditional IRA, you pay income taxes on everything distributed. The additional income might increase your general tax bracket, causing you to pay more taxes on all annual income. The savings account earns interest which is now taxable annually. If you roll the funds into a beneficiary IRA instead, the investments continue to grow and you only add the minimum distribution to income taxes. Some might argue that a Roth IRA doesn't have the tax issue so why not take it all out? True, there is no tax issue upon distributing the Roth, but if you don't need the money, it's best to let it continue to grow tax-free.
- The beneficiary IRA requires annual distributions based on age. The IRS uses life expectancy factor tables to divide into the IRA value and calculate what needs to come out annually. A younger person is required to take less than an older one. A grandchild might continue the growth for decades. Traditional IRA owners over the age of 70 1/2 are required to take the required annual distribution, while Roth owners are not. However, beneficiary IRAs require both traditional and Roth accounts to take the distribution. If you have a beneficiary IRA, you can take more than the minimum required without penalty. So if a grandchild needs money for school or a new car, they can take it without any penalties. Factor the taxes in and you're set.
