Did you inherit an IRA? What you don’t know can hurt you

If you inherited an IRA from someone who wasn’t your spouse, there are steps you should follow or risk losing a big chunk of that inheritance.

Here are the steps you need to take to protect that inheritance:

  1.  Set up a properly titled inherited IRA and have the funds moved via a direct transfer. Do NOT have any funds sent to you by check or they will be considered a taxable distribution.  You must establish this account by Dec. 31 of the year after the account owner’s death.
  2.  You must take your first required minimum distribution (RMD) from the inherited IRA also by Dec. 31 of the year after the account owner’s death.  The distribution is calculated based on your life expectancy factor, which you get by taking your age as of Dec. 31 of the year following the account holder’s death and going to the IRS’ Single Life Expectancy Table in IRS Publication 590.
  3.  Obtain the prior year-end account balance in the inherited IRA.  For example, if you are calculating a distribution for this year, you would use the account balance as of 12/31/2016.
  4.  Divide the account balance by your life expectancy factor to arrive at your RMD for the year, which can be taken at any time during the year as long as it’s by Dec. 31.  For each subsequent year, you reduce your life expectancy factor by 1 to get the RMD calculation for each year.

Hopefully the IRA you inherited was set up to allow you to take the “stretch” option, so you can take RMDs over the rest of your life and save on income taxes.  If the default option on the inherited IRA was for a five-year payout, you are stuck with it and have to take all the funds over a five-year period.

If you miss an RMD, you can be penalized up to 50 percent of what should have been withdrawn – an expensive lesson in not planning properly.  

If you’d like to learn more about how we can help you with your estate planning, please contact us for your initial consultation at one of our conveniently located offices in Fort Pierce, Stuart, Port St. Lucie, Vero Beach, and Okeechobee.