What to Do When You Inherit a Retirement Account

Author: Jeff Horner, Senior Vice President, Wealth Strategist, The Private Bank 05/12/2022

Individual Retirement Account (IRA) owners can name anyone they choose as beneficiary, allowing them to continue their legacy by passing on their hard-earned money after they’re gone. Beneficiaries who inherit a retirement account will need to consider what to do with the money. The following can help you evaluate your options and determine how to move forward.

Pause and Do Your Research Before Making Decisions

Taking time to understand your options is important when you inherit a retirement account. Depending on who inherits the money, including a spouse or a non-spouse, there are different rules about how and when you can take or transfer the funds.

You may want to speak with a financial advisor to determine when you should withdraw the money to avoid paying a penalty. And because the funds beneficiaries withdraw through required minimum distributions (RMDs) are often treated as taxable income, it’s possible that taking a distribution could impact your tax bracket set by the Internal Revenue Service (IRS). A wealth management professional may be able to help you make the most of your money by helping you identify the best time and amount to take from your retirement account.

Taking Required Minimum Distributions For Spouses

If you inherit a retirement account from a spouse, you have more flexibility on when to withdraw the funds. You may choose to roll over the retirement account into your own IRA or begin taking RMDs. In most cases, the withdrawal amounts you take can be calculated over your life expectancy, which can provide tax benefits and help you avoid penalties in the long-term.

For Other Non-Spouse Beneficiaries

If you inherited a retirement account from someone other than a spouse, you are likely required to withdraw the money within 10 years as dictated by the SECURE Act. Unlike a spouse who inherits a retirement account, you are required to act within nine months of the owner’s passing. Otherwise, you may be subject to a 50% tax penalty on future RMD amounts.

Several types of beneficiaries are exempt from the 10-year rule under the SECURE Act, including disabled and chronically ill individuals. In this case, beneficiaries may have more flexibility on when they choose to withdraw funds.

When you inherit a retirement account, you’ll face several decisions that can impact your tax status and income. If you have questions about identifying the best strategy for your financial situation, PlainsCapital Bank can help. Call us today at 866-762-8392 to learn more.

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