Our advisors utilize their experience and expertise and that of their colleagues to develop the best solutions for your complex personal and professional financial situations.
Actionable planning strategies to inform and guide your decision-making.
January 27, 2021
As the population in the U.S. grows older, it is becoming increasingly common for individuals to inherit retirement accounts from their family members or friends. However, it’s important that as an heir to such accounts you follow particular steps in order to avoid making costly mistakes.
There are several options to handling inherited accounts, which depend on a variety of factors including your relationship to the original account holder, the age of the original account holder when he or she passed away and the type of account you’ve inherited. Here are four crucial steps to follow to increase your benefits in the long run:
Once you inherit an IRA, you’ll want to make sure it’s set up correctly. An inherited IRA should have the name of the deceased original owner and it should also indicate that the IRA was inherited. Alternatively, if the deceased was your spouse, you have the option to roll over the amount of the inherited IRA into your own IRA account.
If you’ve inherited an IRA from someone other than a spouse, you will not be able to move money into your own retirement account. In order to keep the tax benefits of the inherited account, you will need to set up a new Inherited IRA for Benefit under your name.1 After the account has been created, you’ll be able to transfer assets from the original account to your beneficiary IRA.
If you’re a spouse of the deceased, the prior year-end account value and life expectancy are needed to calculate the distribution amount on your inherited IRA. For this calculation, the value of the account from the last year is used. For example, in order to calculate distributions for the year 2021 the account value on December 31, 2020, is used.
If you are a non-spousal beneficiary, it’s important to note that you’ll be required to withdraw the entirety of the account within 10 years, if the deceased passed on or after January 1, 2020.2 Prior to the SECURE Act passing, the IRA amount was allowed to be withdrawn throughout the beneficiary’s remaining life expectancy.
Most beneficiaries are either unaware or unwilling to find out if the IRA they’ve inherited has an after-tax basis. If you have inherited an IRA and you find out that it has an after-tax contribution you should fill out a Form 8606.3 By completing this form you’ll be able to claim the non-deductible portion of the required minimum distribution.
You can always ask the executor if they are aware whether the IRA has an after-tax contribution, but they might not know themselves and will need to refer to the tax returns of the deceased to learn if they filled out the form previously.
Taxation of distribution is different for Roth IRAs and other IRAs. In many cases, Roth IRAs have distributions that are tax-free if the beneficiary is taking the minimum distributions (based on pre-SECURE Act rules). However, for other IRAs, the distributions are fully taxable unless the original IRA owner had a tax basis in their IRA. If the distribution is taxable, you can add the taxable portion of the distribution to your own tax projection for the year to estimate the amount of tax you should withhold from any distributions.
As you make a plan for distribution, remember the SECURE Act’s new change for non-spousal beneficiaries. You will be required to distribute the entirety of the account within 10 years of inheriting it. Exceptions to this rule include:
To avoid making costly errors, you should meet with a knowledgeable advisor as soon as you learn that you have inherited an IRA. Mistakes could mean larger taxes and complexities in the long run. Give us a call if you’d like to discuss your own situation.
Please read important disclosures here.
Please read important disclosures here.
Daniel is a Partner and Market Leader for the Houston office with over 20 years of experience as a financial advisor. As a member of...
Ben Pace, Christian Thwaites and James Lebenthal
January 23, 2023 — Economic data, the Federal Reserve, and earnings are sending mixed signals, suggesting potential short term volatility, but mid-long term upside opportunity.
Michael B. Fischer and Frederic Behrens
January 22, 2023 — As part of Tax Cuts and Jobs Act of 2017, the U.S. federal estate tax exemption amount increased to approximately $12.92 million per individual or $25.84 million per couple (2023). As a result, many families are no longer subject to federal estate tax due to the high estate tax exemption amounts. However, several individual states […]
Steven J. Giacona
Partner & Market Leader
January 10, 2023 — As a CPA and financial advisor, clients often ask me for ways to reduce taxes. Since the enactment of the Tax Cuts and Jobs Act of 2017, which limited state and local tax deductions to $10,000, many clients, particularly residents of high-tax states such as New Jersey, New York and Connecticut, have raised the question […]
Theodore D. Schneider
January 10, 2023 — Our team at Cerity Partners is continually inspired by the efforts of charitable organizations and want to offer our assistance to boost planned giving in this time of critical need. As experienced advisors in financial and philanthropic planning, we believe having focused discussions with potential donors regarding the following planned giving strategies are effective tools […]
January 10, 2023 — It is increasingly common for individuals living in the United States or U.S. citizens living abroad to receive an inheritance from a non-U.S. person (for purposes of this article a non-U.S. person is defined as someone who is not a U.S. citizen, permanent resident or otherwise considered a U.S. domiciliary resident). Receiving an inheritance from […]
Curious about learning more? Let’s talk.
Tell us about yourself and your current financial situation without cost or obligation. Receive an introduction to a wealth management colleague, have a personal conversation, and get your questions answered.