You transfer the assets into an Inherited IRA held in your name. 3 – TIME YOUR DISTRIBUTION OF THE PROCEEDS TO YOUR PARTICULAR NEEDS SO YOU CAN CAPTURE MAXIMUM TAX BENEFITS OVER THE ALLOWABLE 10-YEAR DISTRIBUTION WINDOW AND AVOID PENALTIES. The first mistake results in a 50 percent penalty on the amount taken below the RMD. Learn More About Our Approach to Wealth Management, What Happens When an Adult Child Inherits an IRA from a Parent. If you inherited an IRA prior to 2020, you must continue taking your annual RMDs based on your current life expectancy factor. Intergenerational wealth transfers create opportunities and risks, especially for those inheriting a large sum of money. Prior to 2020, the Stretch IRA allowed a non-spouse beneficiary, in this case an adult child, to preserve the tax-deferred nature of the inherited IRA for their lifetime, only distributing their Required Minimum Distribution (RMD) based on their life expectancy factor. Advisors report that inherited IRA recipients too often cash in their IRA prematurely, losing tax benefits that could have been theirs if they had only waited a little longer to reflect carefully. What are the tax implications? You won’t have to make one for them. So, remember, if you are inheriting an IRA, take your time to evaluate your unique situation and discuss your distribution plan with your advisor to ensure you withdraw the funds in the most tax-efficient manner. You will not incur the 10% early withdrawal penalty. And with boomer heirs on the precipice of the largest wealth transfer in history — an estimated $30 trillion over the next few decades — understanding the finer points of an inherited IRA is more important than ever. Note that RMDs are suspended for 2020 for everyone with IRAs, including inherited IRAs, as a result of the Coronavirus Aid, Relief and Economic Security (CARES) Act that became law in March 2020. This summary is intended to provide general information only, may be of value to the reader and audience, and may include the opinions of Commerce Trust Company, which are subject to change. And with boomer heirs on the precipice of the largest wealth transfer in history — an estimated $30 trillion over the next few decades — understanding the finer points of an inherited IRA is more important than ever. 2 – IF YOUR PARENT WAS PAST AGE 72, FIND OUT IF HE OR SHE MADE THE REQUIRED MINIMUM DISTRIBUTION THAT YEAR. While some of the provisions are beneficial to retirees, the SECURE Act is also extremely beneficial to the government since its elimination of the Stretch IRA is estimated to raise over $15 billion in income taxes over the next ten years. There is no 10% early withdrawal penalty for a lump sum distribution, but it will incur income taxes. You just need to be sure the amount you withdraw is above the annual Required Minimum Distribution (RMD), the minimum amount you must withdraw from your IRA account each year once you have reached 70 ½. It’s important to realize that taking inherited IRA distributions — especially a lump sum distribution — may bump you into a higher tax bracket, since the money will be counted as earned income for the year. RULE NO. However, if you elect to take the life expectancy method, distributions that fall below the RMD will still be subject to the 50 percent penalty. 1 – DO NOT DO ANYTHING ABRUPTLY. Receive the latest insights from Commerce Trust Company. ■ Plan for any big ticket expenses such as a car purchase, a home improvement, a wedding, or college tuition within your 10-year withdrawal window. Rolling over an inherited IRA can be appealing, since you will gain control over the distributions. © 2020 Forbes Media LLC. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets. An expert lays out your options and helps you avoid tax mistakes. If you envision future years when you will be in a lower tax bracket plan to take distributions in those. Be sure to match your investment approach with when you will need the funds, ensuring you have.
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