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You’re in a Loved One’s Estate Plan and Inherit an IRA – Now What?

If you recently inherited an IRA or 401k, then someone close you passed away and we offer our condolences. The passing of a loved one is never easy, and, in fact, the loss may temporarily impair your judgment. We encourage you not to make any hasty financial planning decisions, especially if they can’t be reversed easily.

If the deceased is your spouse, the following guidance doesn’t apply to you. You’ll be governed by a different set of rules, depending on your late spouse’s age and whether you choose to take a distribution, transfer the funds to your own IRA, or open an Inherited IRA.

If you inherited a 401k or IRA from anyone other than your spouse, contact the account manager and request the account not be liquidated. If the account is liquidated or if you accept a check for the funds in the account, you will immediately owe taxes on the money, and all benefits of the account are lost.

Moreover, the funds can’t stay in the original owner’s account indefinitely. By December 31 of the following year after the owner died, you must begin taking at least required minimum distributions (RMD) annually. The plan administrator can advise you regarding the specific RMD rules, and you can withdraw anything from that amount up to the full value of the plan.

Before deciding how much to withdraw, find out whether the IRA is a Roth (post tax) or a traditional (tax deferred) IRA. If your inheritance was a tax deferred IRA or 401k, be prepared to share a portion of the inheritance with Uncle Sam. Consult your CPA concerning how much to set aside for individual income taxes so you’re not caught short at tax time. Moreover, withdrawing your entire inheritance in a lump sum may result in a severe tax burden.

If you don’t need the full amount of your inheritance immediately, you may be able to reduce your IRS obligations by planning an income tax strategy with your financial planner or CPA. Since 2007, if you inherit a 401(k) you may roll it over into an Inherited IRA, which carries the same minimum withdrawal and tax implications as a traditional IRA.

Many variables – including your age, the amount of the inheritance, and your present financial situation – should be considered and prevent a template approach. Seek assistance from a trusted professional, who will tailor an appropriate financial plan for your individual situation.

Ensuring you make the best tax planning decisions is an important aspect of financial freedom, and in the long term, retirement planning. The proven accountants at Patrick & Robinson CPAs are here to help.

Contact us at: or 904-396-5400.

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