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5 pete thoresenRetirement Accounts provide a tax-deferred inheritance to its beneficiaries. Yet the rules can be complicated, especially for spouses! For this article, I assume the IRA owner dies before age 70 or before beginning what the IRS calls the "Required Beginning Date".

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As a recipient, you are either a spouse or not.

If you are not a spouse, then you will have 2 options:

  1. Take a lump-sum check(s) over a max 5 year period following death.....100% taxable to you!
  2. 'Roll' monies into an "Inherited IRA" account. In this case, recipient is required to receive taxable annual distributions over your lifetime based upon your life expectancy. This is an IRS formula, but generally is as follows: Subtract your age from 85.....this is the divisor. Take the amount of the account and divide by the divisor, and this is you annual required distribution.

If you are a spouse, then you 3 options:

  1. Same as option a above....take out the money in 5 years and pay taxes.
  2. Somewhat same as above, "roll into inherited IRA". Yet, for a spouse, the required distributions are deferred until the owner would have turned 70½ years old. So, you can choose to defer withdrawals and let the account grow, or can choose to take out some, and pay taxes. Lastly, as a spouse, you can choose to roll an Inherited IRA to your own later
  3. Spouse can treat IRA as his/her own or "Roll" it to an existing IRA if already have one. In this case the inheritance status is eliminated, and IRA ownership rules prevail.
    This last option can be tricky and best answer depends on personal circumstance. Yet, normally this option is best if the inheriting spouse is younger than deceased, yet older than 59½. This last point is most important, because if you are under 59½, and roll into your own IRA, then you cannot access this account without penalty (10% on top of taxes) until you turn 59½. As such, it is almost always better to roll to an "Inherited IRA" which allows for early withdrawals, and avoids any penalty. Then, after you turn 59½, you can roll it to you own IRA if it make sense in future.

If the deceased was over 70 upon death, then the rules change further...becoming more complicated. I recommend seeking professional advice if you have any concerns.

Pete Thoresen
Financial Advisor
Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 300
Minneapolis, MN 55426
952-225-0344 direct | 952-591-9770 main office

Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Advisory services offered through Focus Financial Network, Inc., a registered investment advisor. Royal Alliance Associates, Inc. does not provide tax or legal advice.

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