What can you do with inherited IRA? Inheriting an Individual Retirement Account (IRA) can be a significant financial windfall, but it also comes with important decisions and considerations. Understanding the options available to you can help you make the most of this inheritance and ensure you’re in compliance with the rules and regulations surrounding inherited IRAs.
When you inherit an IRA, you have several choices on how to handle it. Here’s a closer look at the options you have and what you should consider:
1. Take Required Minimum Distributions (RMDs): As the heir to an IRA, you are required to take RMDs each year, starting the year after the original account owner passes away. These distributions are calculated based on your life expectancy, and failing to take them can result in penalties.
2. Transfer the IRA to a Beneficiary IRA: You can roll the inherited IRA into a Beneficiary IRA, which allows you to continue deferring taxes on the funds. This can be a good option if you’re not yet ready to take distributions.
3. Convert the IRA to a Roth IRA: If you have the financial means to pay taxes on the converted amount, you might consider converting the inherited IRA to a Roth IRA. This could provide tax-free distributions in the future, though it’s important to consider the tax implications now.
4. Cash Out the IRA: While not the most tax-efficient option, you can cash out the inherited IRA. However, you’ll need to pay taxes on the entire amount and may face a 10% early withdrawal penalty if you’re under the age of 59½.
5. Spousal Rollover: If you’re the surviving spouse of the IRA owner, you have the option to roll the inherited IRA into your own IRA. This can provide you with greater flexibility in managing the funds.
6. Charitable Donation: You can also choose to make a charitable donation directly from the inherited IRA, which can be a tax-efficient way to support a cause you care about.
When deciding what to do with an inherited IRA, it’s important to consider your financial situation, your goals, and the tax implications of each option. Consulting with a financial advisor or tax professional can provide you with personalized guidance to make the best decision for your unique circumstances.
Remember, each IRA has its own set of rules and regulations, so it’s crucial to understand the specific details of the inherited IRA you’ve received. By taking the time to explore your options, you can ensure that your inherited IRA serves you well in the years to come.
