Inherited IRAs can be complicated for heirs.
Some assets are simpler to inherit than others.
Not too long ago, IRAs were a flexible and desirable asset for estate planning.
This is no longer the case.
According to a recent yahoo! finance article titled “What Happens When I inherit an Annuity?,” the SECURE Act is responsible for this change.
The SECURE Act placed more restrictive regulations on Inherited IRAs.
Most notably, it eliminated the ability to use a “stretch” IRA strategy for estate planning.
How did it accomplish this?
Before the SECURE Act, the beneficiaries could take distributions from the IRA over their lifetimes, allowing the IRA to continue growing tax-deferred.
Now, heirs who are not the spouse of the deceased, subject to narrow exceptions, must deplete the Inherited IRA within ten years of the death of the original owner.
As a result, careful planning is essential to avoiding tax pitfalls.
If you want your assets to serve your heirs well after you die, you must start by designating beneficiaries to your retirement account.
If you fail to do so, the asset will become part of your probate estate.
You should name a primary beneficiary and successor beneficiaries should the original beneficiary die before they can inherit.
If your original beneficiary can inherit the IRA, this heir can select new beneficiaries.
Whether you are inheriting an IRA or your heirs will inherit yours, all parties must understand the rules and timelines for Inherited IRAs.
A spouse is the ideal person to name as the beneficiary for an Inherited IRA.
Spouses can treat the IRA as their own.
The tax implications and flexibility are far better than for other individuals.
An important component of Inherited IRAs is the Year of Death Required Distribution.
What is this?
If the original owner was over a certain age, then a Required Minimum Distribution may need to be withdrawn the year the owner died.
In this instance, the tax return for the heir could be impacted.
Awareness of potential tax breaks can help heirs manage this asset better.
Non-spousal heirs of an Inherited IRA can deduct the estate tax paid on the IRA amount from their income taxes.
Because Inherited IRAs have become more complicated, people should work with an experienced estate planning attorney to navigate how to optimize these assets for their heirs.
Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”