TwoMust-know Facts About Inherited IRA

For first-time heirs of an inherited individual retirement account (IRA), the importance of hiring the services of the best Rochester accountant specializing in tax matters cannot be overemphasized. Certified public accountants (CPA) are the best professionals to have on your corner when dealing with the tricky three-way intersection of tax planning, estate planning and financial planning that comes with the territory of being the IRA heir of your deceased spouse or relative.                                                        

With the Internal Revenue Service being the aggressive government tax collection agency that it is at present, a single simple mistake can easily result in expensive consequences. You may even find that being the single heir of your deceased spouse’s IRA adds to your burdens!

The best piece of advice you can receive upon notification of your status as an IRA heir: Do nothing until such time that you have discussed your options with a Rochester accountant from the ranks of Rizzo, DiGiacco, Hern&Baniewicz! From our experienced Rochester CPA, you will learn these facts about inherited IRA and, thus, make wiser decisions about it.

1) Choice Between the Five-year Rule and Stretch the IRA

Unless the beneficiary of the inherited IRA is a spouse, the money should be taken out in the future. This means that, if you have inherited the IRA from a non-spouse like a sibling or a child, then you have two basic options for liquidating your inheritance account, namely:

• Get distributions over your life expectancy, an option known as the stretch option that accountants know can be tax gems for the beneficiary when handled correctly

• Liquidate the account within 5 years of the original owner’s death, known as the 5-year rule

Your Rochester accountant will also determine whether the distributions from an inherited IRA are taxable or non-taxable in nature. Be sure to work with your accountant because the tax consequences can be expensive wen the fund is incorrectly handled.

2) Let It Be If You Were the Spouse

Spouses hit the jackpot, so to speak, because they can treat their inherited IRAs from their deceased spouses exactly as if these accounts were their own. You will not have any problems about letting your money sit as is, which is in contrast with the inherited IRAs from non-spouses where the account must be liquidated, as mentioned above.

But like all inheritances, you are still well-advised to discuss your roles and responsibilities in IRA management with your trusted Rochester CPA to avoid tax-related issues, among others. For example, you can choose between these two options:

• To let the money in the IRA grow until you reach the age of 70½ years with no distributions required or made

• To get distributions before age 59½ with the understanding that you will be liable for the 10% early withdrawal penalty.

Your choice between the two options can be facilitated by discussing the financial pros and cons with your trusted Rochester accountant. Always remember that letting the money as is or withdrawing from the inherited IRA will have monetary consequences and you will ultimately either reap the rewards or suffer through the losses.