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  • Writer's pictureWealth Legion

Inherited IRA

An "inherited IRA" is an individual retirement account that a beneficiary inherits after the death of the original account holder. When someone inherits an IRA, they typically have options regarding how to handle the account, including taking distributions over time or withdrawing the entire balance.

Example 1: A wife inherits an IRA from her deceased husband. Let's say James had an IRA with a balance of $500,000 when he passed away. As his spouse and the designated beneficiary, Doris has a few options for what she can do with the inherited IRA. She could choose to roll it over into her own IRA, treating it as if it were always hers, or she could elect to treat it as an inherited IRA, taking distributions over her lifetime based on IRS rules. If Doris chooses to treat it as an inherited IRA, she would have to start taking required minimum distributions (RMDs) based on her life expectancy starting the year after her husband's death.

Example 2: A son inherits an IRA from his deceased mother. Suppose Dorothy had an IRA with a balance of $300,000 when she passed away, and her son Michael was named as the beneficiary. As the beneficiary, Michael would need to decide how to handle the inherited IRA. He could choose to take a lump-sum distribution, which would subject the entire balance to income tax in the year of withdrawal, or he could opt to take distributions over his life expectancy, which would spread out the tax liability over time. If Michael chooses the latter option, he would need to begin taking RMDs by December 31 of the year following his mother's death. The specific RMD amount would be calculated based on Michael's life expectancy and the balance of the inherited IRA.

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