Do you hate headaches? Well, you will probably get one if you inherit a traditional IRA . Why you ask? Well, the United States government has decided to create what I call the “labyrinth” of tax code for inherited IRAs. Why they decided on this, I have no idea. For all we know it’s to create more government jobs! What I do know is that most people make serious mistakes when they inherit an IRA account and hopefully we can clear up some of the common issues now. It all starts when you get a notice that a family member has passed away and you were the beneficiary of an account. The first question you should ask yourself is if the IRA owner died before or after April 2 after the year the person turned 70 1/2. If the person had still been alive, he or she would have had to take minimum distributions. The answer will determine the tax implications of an inherited IRA. Now, before you go and make any hasty decisions, let’s go over some general rules for two situations. IRA Inheritance from a Spouse This is the most typical situation for most Americans. Your husband or wife will pass away and leave you with their retirement savings. You have three options in this case: 1. Designate yourself as the new account owner. 2. Roll it over to one of your existing accounts. 3. Consider yourself a beneficiary, not the owner of the inherited account. Doesn’t sound too bad now does it? Inheriting a IRA account from a spouse gives you the freedom and flexibility to avoid unnecessary taxes. Also, the surviving spouse is able to name another beneficiary. Consider this as a type of “baton” hand off. The object (IRA account) stays the same but the runner (beneficiary and account owner) changes. You can also forgo all of this and start taking minimum distributions if you’re under 59 1/2. You’d want to make sure you actually need this income now versus letting the money stay in a tax sheltered account. It’s really up to you. Non-Spousal IRA Inheritance This is where things get complicated. If you inherit a IRA account from a non-spouse, you’re not allowed to treat it as your own according to federal regulations. This means no contributions are allowed to this account and rollovers are out of the question. Where you go from here depends on when the IRA owner passed away. You have two options: 1. After the minimum distribution date has passed. In this case, you will have to follow the set distribution schedule put in place by the owner. You can reference the official distribution tables here . 2. Prior to the minimum distribution date. For this situation, you can ask to have the entire IRA account distributed over a set period depending on your life expectancy. Inherited IRA Takeaways Now that you know the basics, let’s wrap this up with some general rules to live by. Here are a couple things to think about if you ever find yourself inheriting an IRA: Use life expectancy payout. If you do this, you can take out distributions from an inherited IRA over your lifetime! Do the necessary tax research and use the IRS website to your advantage. Seek out a qualified representative. You don’t want to look back and cringe at a bad decision you’ve made. OK, take a breather. Believe it or not, this is just a snapshot of how complicated inherited IRAs can get. This post should be enough information for your situation but I would still recommend you to seek out a Christian financial planner to help you navigate this muddy tax code. You don’t want to find yourself in a bad situation based on a lack of knowledge. No one wants t0 pay Uncle Sam more than they have to! Have you inherited an IRA account? How did the process work? Meet us in the comments! Image by JohnKwan / Shutterstock Related Articles: Tax Treatment for Inherited IRAs How to Calculate Your Required Minimum Distribution (RMD) What are Required Minimum Distributions or RMDs? Roth IRA Tax Benefits and 2010 Conversion Rules When Can You Withdraw From Your Traditional IRA? Should you convert your IRA to a Roth? Roth IRA 101 Jon is a Christian personal finance writer at Free Money Wisdom . His mission is to help you succeed in your personal finance life with the Bible as your compass. When Jon is not writing on personal finance, he spends time with his girlfriend, lifts iron at the gym, and plays Scrabble. You can subscribe to his site through EMAIL / RSS or you can also find him on Twitter and Facebook . The articles on this site are for entertainment purposes and should not be taken as financial advice. Please contact a financial professional for specific advice regarding your situation. Also, many of the CPF articles help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others. Find out more here .
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The Tax Treatment of Inherited IRA accounts