7 Things Benefactors and Inherited IRA Holders Need to Know

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An Inherited IRA is an account structure that allows beneficiaries to manage an inheritance that was passed down to them via an IRA or 401(k). Self-directed IRA holders who wish to pass along their retirement savings to their heirs have several choices to make regarding the future of their accounts. These choices include devising a way to limit the tax consequences of their accounts, while also anticipating an Inherited IRA account structure that will make it easy for their beneficiaries to manage the inheritance when the time comes.

Below are seven things that self-directed IRA benefactors and beneficiaries should consider when devising a strategy for their Inherited IRAs.

  1. Typically, you are able to withdraw money from your self-directed IRA without penalty as long as you return it the account in full within 60 days. When an IRA is inherited, this 60 day grace period does not apply.

  2. Beneficiaries of an IRA have to follow certain rules in terms of retitling the IRA before taking distributions. Depending on whether or not the beneficiary is a spouse or non-spouse of the deceased, and depending on the account type they’ve inherited, the beneficiary has a few different retitling options. In any case, the beneficiary will need to procure a new deed to convey the change of ownership of the IRA. The retitling will more than likely need to be done with the help from an attorney or title company.

  3. Distribution options vary between spouse and non-spouse beneficiaries. If the beneficiary is a non-spouse, they can open an Inherited IRA in their own name, transfer the assets to that IRA, and then take required minimum distributions. Or, a non-spouse can immediately distribute the assets they’ve inherited and pay the taxes. A third option for non-spouse beneficiaries is to open an Inherited IRA and distribute IRA assets over a 5-year period, thereby spreading out the tax liability. Spouses as beneficiaries have different distribution rules for inheriting an IRA, which can also be dependent on the IRA account type they’ve inherited. You can read more about spousal beneficiary distribution strategies here. The beneficiary has one year to decide which action to take, and to execute the action.

  4. Because beneficiaries are faced with required minimum distributions with an Inherited IRA, eventually all the money within the Inherited IRA will have to be completely withdrawn – and depending on the chosen strategy, the emptying of the account can happen sooner than later. Due to this fact, at some point it will not be economically feasible to hold alternative assets such as real estate in the self-directed Inherited IRA any longer. At this time, beneficiaries can open a new self-directed IRA account and transfer the assets they’ve inherited into their new account. It’s important for beneficiaries to anticipate how required minimum distributions will affect their long-term strategies for their account.

  5. Self-directed IRAs can be split between multiple beneficiaries. Spousal beneficiaries of an Inherited IRA have the option to roll the assets into their own IRA, and then wait to distribute the money until they reach the age of 70.5 (if rolled into a Traditional IRA). Heirs who are not spouses must begin taking minimum distributions from the Inherited IRA the year that the original account holder died; regardless of whether the account is a Roth or a Traditional IRA.

  6. A self-directed Inherited IRA can be invested in many alternative assets, including real estate, precious metals, private lending, private equity, raw land, and more. You can learn more about how to invest in real estate with an Inherited IRA here. Or, if you're the beneficiary of a self-directed IRA that has real estate in the account as an asset, learn about your distribution options here.

  7. Instead of using the typical IRA distribution guidelines, self-directed Inherited IRA owners can lower their distribution requirements by dividing the total amount in the Inherited IRA by their life-expectancy. This calculation will actually elongate the tax benefits of the account. Some 401(k) accounts are structured differently; particularly if they are employer plans. Certain employers may not allow beneficiaries to stretch out the benefits of an Inherited IRA plan. Beneficiaries and self-directed IRA holders who want to pass on their estate should check with their employer to ensure they understand the restrictions of their plans.

Please don't hesitate to contact New Direction Trust Company at 877-742-1270 or info@ndtco.com.