The death of a loved one is always a difficult time. A frustrating part can be dealing with their final expenses and closing out their various financial accounts. Knowing what you need to do in advance can save you from a lot of complications. This is especially true when inheriting an Individual Retirement Account (IRA).
1. CONTACT THE FINANCIAL INSTITUTION
The first step you want to take is to contact the financial company where the IRA is being held. Their representatives are licensed and trained to walk you through the entire process. They can tell you a number of things:
– If you are a named beneficiary
– Identify the options available to you
– What paperwork you will need and where to get them
– Walk you through their forms
– The transfer procedure of the assets
2. HAVE YOUR PAPERWORK IN ORDER
The first document you will need is the official death certificate. This must be an original copy from the county in which the person passed away. If their residence was in “County A”, but they died in “County B,” you must obtain that official copy from “County B.”
If the deceased has a Will, you will need to take a certified copy of it to the Clerk of Court to get a Letter of Testamentary. This Letter from the probate court recognizes you as the executor of the estate. The financial institution holding the IRA must have an official copy of the death certificate and the Letter of Testamentary on file for regulatory purposes.
3. INSTITUTION FORMS
Financial institutions have created their own forms to delineate your intentions. These regulated forms can be confusing with the language required on the documents. We always recommend that you contact the financial institution’s representative to walk you through their forms.
4. SPOUSE INHERITANCE
A spouse inheriting an IRA has additional options beyond what other beneficiaries have. As a surviving spouse, you have the following options.
Change it to your name
You can have the IRA changed to your name. Any age related issues as far as access or distribution will reset to your age. For example, if your spouse held a Traditional IRA and was about to turn 70 ½ years old, they would be required to take a Required Minimum Distribution (RMD) each year. Once the account is in your name, the account follows your age requirements.
Transfer the assets to your own account
If you have an IRA or 401k, you can move the money to one of your existing accounts. This transfer can happen without having to pay taxes on it as long as it is going to a similar account. For example, if they had a Roth IRA, the assets could only go into another Roth account. Roth IRAs and Traditional IRAs act differently when it comes to taxation. Moving assets between a Roth and Traditional would have tax implications. Speak to your financial representative for further details about this.
5. NON-SPOUSE INHERITANCE
Non-spouse means exactly that. You could be related to the deceased as a child, sibling, parent, or other family bonds, but not being a spouse prevents you from certain transfer options. Spouses are allowed to use these options, but non-spouses are not allowed to use the spouse only options.
Taking a lump-sum
The option of completely emptying the account of all assets is a viable option. This choice does have tax implications that you should consult your tax professional about. The taxation on this option would only be on the assets. You would not have to incur the additional 10% tax penalty for being under the age of 59 ½.
Renouncing your claim
As the beneficiary, you do have the right to give up part or all of your claim on the IRA. There are many reasons some would do this. One reason is that it allows the secondary beneficiary to collect instead of the primary.
If you are not a beneficiary spouse, you cannot take the IRA as your own. It must remain in the deceased person’s name as inherited IRAs. As the beneficiary, you can only receive distributions from the account. You cannot make any deposits into the account. Each year you must take a Required Minimum Distribution (RMD) until all of the assets are released. There are tax implications on these distributions that the financial representative and your tax professional can explain to you in more detail.
6. TAX IMPLICATIONS
As mentioned previously, there are tax implications you must understand. When you receive a distribution, it is taxed at your ordinary income level. If you receive a lump-sum, that additional income could move you into a higher tax bracket depending on your financial situation.
7. REQUIRED MINIMUM DISTRIBUTIONS (RMD)
A Required Minimum Distribution (RMD) is a small amount of money the IRS requires to be taken out yearly. There is a calculation that is used to identify the small amount that needs to be taken. Many financial institutions can set up an automatic program for you, where you choose how you want the RMD distributed to you. It could be the whole amount on a certain day each year. Other options are that you can have the RMD total amount divided up bi-annually, quarterly or monthly. Each financial institution has its own unique ways they do this, so consult one of their representatives.
CHOOSE WHAT IS RIGHT FOR YOU
Each of the options above has their own pros and cons. Just know that there are not any regulations that require you to act immediately after the death of your loved one. Financial institutions deal with this issue daily and have procedures on how to assist you. They will give you the time to think things over and educate you on all of your options. With your documentation in order, settling this final piece of business can be solved with one phone call. Learn more about your options through our resources and professional staff.