Proceed With Caution on Inherited IRA’s

Parents and grandparents who saved and invested in retirement accounts should take special care to make sure their children and grandchildren receive the most benefit from their inheritance.  A recent Wall Street Journal article highlighted some of the complex rules surrounding the inheritance of IRAs. 

Client regularly ask whether they should liquidate an IRA.   Rather than taking a lump sum distribution, and paying the accompanying taxes, clients will often derive the most tax-efficient results by transferring the assets into an inherited IRA.  An inherited IRA allows a young beneficiary to spread distributions across his or her longer life expectancy.  Simply taking small, annual distributions can allow the IRA to grow while minimizing the tax burden borne by the recipient of the inherited account.

Individuals should be wary of receiving any funds in their name. Clients looking to move the account from one brokerage account to another should do a direct “trustee to trustee” exchange.  Otherwise, the IRS deems the transfer as a total distribution which is subject to tax.

As with most financial planning decisions, you should consult with tax and investment professionals before jeopardizing potential tax advantages.

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