Options for Inherited IRAs

 Posted on May 12, 2014 in Estate Planning

Individual Retirement Accounts (IRA) are savings accounts that allow people to save up for their retirement, either tax-free or tax-deferred. Even though funds are accessible at any time, early withdrawal results in penalties. However, there are some exceptions.

Spouses who inherit an IRA have choices to make regarding what to do with those funds. A spouse can either combine it with their own IRA or can move it into an inherited IRA. Financial planners advise the spouse to make that decision based on their age and the deceased spouse's age.

A surviving spouse, younger than 59 1/2 years old, would be better off remaining a named beneficiary instead of rolling it into their own IRA if they will need access to the money. If the two IRAs are combined, there would be a 10 percent penalty if the surviving spouse needed to make any withdrawals. If the deceased spouse's IRA is renamed an inherited IRA, funds can be taken out with no penalties.

If the surviving spouse is younger than 70 1/2 and does not need the money, then the funds should get rolled into their own IRA. They will not be required to take any distributions on the account until they turn 70 1/2. Owners of IRAs are required to begin taking distributions on the first of April of the year after they turn 70 1/2. This is referred to as the "required beginning date."

If the spouse who owned the account died before the date they were required to begin distributions, and the surviving spouse remains a beneficiary, they will not have to take any distributions until the year the passing spouse would have turned 70 1/2, regardless of their own age, thus letting the account earn that much more interest.

Estate planning can be very confusing because of the all the rules and regulations that need to be followed. Contact a knowledgeable Wheaton estate planning attorney to help you ensure that your family's future will be secure.