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Tax Preparation for Inherited IRAs

Posted on: December 21st, 2014
inherited IRANon-spousal inheritances of Individual Retirement Accounts (IRAs) present a few tax challenges. Spouses have the option of a spousal rollover, often deferring taxes and distribution requirements. For non-spousal beneficiaries, extended tax-deferred growth of the assets is not as simple with Required Minimum Distribution (RMD) rules.

How can one minimize tax implications when inheriting an IRA?
Avoid consolidation. Non-spouses who inherit IRAs are not allowed to contribute to the accounts. If an individual combines an inherited IRA with one of their own, the action might be interpreted as a distribution. Income tax, early withdrawal penalties, and missed opportunity for tax-deferred growth are likely.

Disinherit. Depending on the value of the retirement account and the beneficiary’s individual needs, it may not be worthwhile to accept the account. By way of a qualified disclaimer, the beneficiary could elect not to inherit their share, which would allow receipt by other beneficiaries who may have a greater need for the funds, or younger beneficiaries who can “stretch” the account over a longer time period, maximizing tax-deferred growth.

IRA Trust. If you are an IRA account owner and you have designated non-spousal beneficiaries on the account, a better option might be an IRA Beneficiary Trust. IRA Beneficiary Trusts are designed to hold appointed retirement account assets, provide creditor and divorce/remarriage protection, preserve assets for multiple generations, and allow stretching of the benefits. Instead of naming individuals on an IRA beneficiary form, the trust would be named. The individuals would then be named beneficiaries of the trust itself. (If only one IRA account beneficiary is named, the individual automatically has the ability to stretch even if a trust was not established.)
Consult with a knowledgeable estate planning attorney to find out how to best protect your retirement accounts for younger generations. 
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