An Inherited IRA (IIRA) can establish highly profitable and secure investments. Knowing what and how to use it tax free is however, the key.
An IIRA is a retirement account left to a beneficiary after the death of the original owner of the account. If the owner had reached the age of 70 ½, the beneficiary must begin taking the required mandatory distributions (RMD) as calculated or submit a new schedule in accordance with his or her life expectancy. If the owner had not chosen a required mandatory distribution schedule or reached 70 ½ years, the beneficiary has a 5 year window to withdraw the funds which is taxable.
Inherited IRAs may come in the form of Traditional accounts which means the taxes will be deferred until withdrawal commences after age 59 ½. The Roth account is tax-free for the life of the account where distributions may also commence at age 59 ½ onwards tax free. In many cases, these accounts are strategically converted into self-directed IRA accounts that can be grown expeditiously and securely using real estate generating double digit annual returns. In many cases the large amounts established in the accounts serve as an insurance income for many at the age of retirement.
Spouses are allowed to rollover IIRAs into their own account without taxation but others are not without it being taxable. The best way to overcome this is by retitling the account. Let’s look at the process for each beneficiary type:
1. Can rollover into her own IRA account tax-free or retitle it. Retitling has to be very specific for example John Molina dies leaving Gina the account. Gina would title it specifically as "John Molina IRA (deceased Aug. 2, 2012) for the benefit of Gina Molina, beneficiary."
2. If it’s a traditional IRA when the original owner reached age 70 ½ years old mandatory distributions are required. The spouse can however retitle it in her name prior to the latter date and by her 59 ½ birthday so that she can defer mandatory distributions out the farthest. If it is a Roth account she can leave what she doesn’t use for the next generation.
Non Spouse inherits
1. You cannot roll over the deceased account into your IRA account or cash it out without a taxable event and possibly losing the tax shelter benefits. It would be best to retitle it with you Ester as the beneficiary as follows: John Molina IRA (deceased Aug. 2, 2012) for the benefit of Ester Molina, beneficiary." If there are multiple siblings apportioned it, they can retitle their portions with each one as beneficiary.