Inheriting IRAs

In a recent private-letter ruling, the agency allowed a teenage girl who inherited her father’s tax-deferred retirement assets to undo a lump-sum distribution her mother made and transfer the money into an inherited IRA. This private-letter ruling only applies to those taxpayers who ask for it, and it does not set a precedent. In light of this recent ruling, the Wall Street Journal published some helpful tips for those who inherit IRAs. A few of those helpful tips are below:

1. An inherited IRA can be more valuable if a taxpayers leaves it intact and takes annual withdraws as opposed to liquidating and paying taxes right away.
2. If a taxpayer inherits an IRA from someone other than his or her spouse, the IRA cannot be rolled into another IRA. Instead, the taxpayer must re-title the IRA to clarify that the owner is deceased and the taxpayer is the beneficiary.
3. Taxpayers must meet the appropriate deadlines. If the IRA owner died after 70 ½ (when required withdrawals start), the beneficiary must ensure that a withdrawal is made by Dec. 31 of the year the decedent died.
4. Heirs of Roth IRAs are required to withdraw a minimum amount every year or pay a 50% penalty.

For more information on inheriting IRAs, see Kelly Greene, Pitfalls of Inherited IRAs, The Wall Street Journal, Dec. 10, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.