What to do with an inherited IRA can seem overwhelming at first, but inheriting an IRA can be a significant financial asset. It’s important to understand the options available to you and how to make the most of the money you’ve inherited. If you’ve inherited an individual retirement account, there are many planning decisions that need to be made from tax implications to planning for your new investment. Learn the steps you should take and learn what to do with an inherited IRA and maximize the benefits of your inheritance.

First, let’s define what an inherited IRA is. An inherited IRA is an individual retirement account that is passed down to a beneficiary after the original owner passes away. The beneficiary can be a spouse, child, grandchild, or other designated person. When you inherit an IRA, you will need to take specific actions based on your relationship to the original owner and the type of IRA they held.

What To Do With an Inherited IRA

  1. Evaluate your relationship to the original owner of the IRA

The first step in managing an inherited IRA is to evaluate your relationship to the original owner. If you are the spouse of the original owner, you have the option to roll over the inherited IRA into your own IRA. This can be beneficial if you are younger than the original owner because it allows you to continue to defer taxes on the money in the IRA until you retire.

If you are not the spouse of the original owner, you cannot roll over the inherited IRA into your own IRA. However, you have other options available to you, such as taking distributions or transferring the inherited IRA to an inherited IRA in your name.

  1. Determine your distribution options

Once you’ve determined your relationship to the original owner, you’ll need to determine your distribution options. This is something you don’t want to wait too long on, as you may be missing deadlines and incurring tax ramifications. The IRS requires that you take minimum distributions from an inherited IRA, based on your life expectancy. You can also choose to take distributions over a shorter period, such as five years, but keep in mind that this will result in a larger tax burden.

If you’re not sure which distribution option is best for you, it’s a good idea to speak with a financial advisor or tax professional who can help you make an informed decision.

  1. Review the tax implications

Inherited IRAs have different tax implications than other types of retirement accounts. The tax treatment of an inherited IRA depends on your relationship to the original owner, the type of IRA they held, and how you choose to take distributions.

In general, if you inherit a traditional IRA, you’ll be required to pay taxes on any distributions you take. If you inherit a Roth IRA, distributions are tax-free, as long as the original owner held the account for at least five years.

  1. Consider your investment strategy

Finally, it’s important to consider your investment strategy when managing an inherited IRA. You’ll want to review the investments in the IRA and decide whether they align with your financial goals and risk tolerance.

If you’re not comfortable managing the investments yourself, you can consider working with a financial advisor who can help you develop an investment strategy and manage the inherited IRA on your behalf.

Managing an inherited IRA can be complicated, but by following these steps, you can make informed decisions and maximize the benefits of the IRA. Always consult with a professional in your area, especially if this is something new to you. You can consult with a financial planner, estate planning attorney, or a tax professional. By taking these steps, you can ensure that the inherited IRA supports your financial goals and provides long-term benefits.

If you are in Illinois or Wisconsin, we can help you. Contact us and let us know where you are in the process and what we can do to help.

Sign up for our newsletter to receive business updates and estate planning tips right to your inbox!

Like us on Facebook to keep up with new blog posts and daily tips!

Disclaimer: This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is a substitute for, qualified legal advice. Your review or receipt of this article by Lexern Law Offices, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this article are those of the authors of the article and does not reflect the opinion of the LLG.