Inherited IRAs Provide Heirs Shelter from a Tax Storm

An inherited IRA offers non-spouse beneficiaries shelter from a potentially large tax burden. The only person who can take a deceased persons' IRA and put it in their own IRA is a surviving spouse. Non-spouse beneficiaries, like children, cannot.

Non-spouse heirs have two options. They can cash out the IRA and pay the taxes, which could cause a huge tax loss, or the government will allow them to establish what is known as an inherited IRA. An inherited IRA protects the money from tax, but the heir is required to take a small taxable distribution every year - resulting in a smaller tax burden.

The Piershale team

When using an inherited IRA strategy, you must keep these key factors in mind:

• The deceased IRA owners' account needs to be re-titled into an inherited IRA by September 30 of the year after the person passes away. The first distribution has to be taken by December 31 of that year.
• The IRA custodian is required to re-title an inherited IRA for non-spouse beneficiaries by the above deadline, but is not required to contact the non-spouse heir to take out the first distribution by the December 31 deadline. If this deadline is missed, the heir will be subject to a 50 percent penalty. 
• If the deceased retirement plan owner leaves money in a company plan such as a 401(k) until death, the non-spouse heirs do have the right to transfer it to an inherited IRA. However, the responsibility to transfer and re-title it by the September 30 is now that of the non-spouse heir.

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