Attorney & Mediator
Attorney & Mediator

IRA’s and How to Handle

Clients are often confused about the manner of passing along IRA accounts upon their death to their family.  Heirs are confused about how to withdraw the assets.

If you are married and name a spouse as the primary beneficiary of the IRA, he or she can roll it over into his or her own name.

If you are not married, it is important to understand the rules.  If you leave it to your estate, it will be paid out in a lump sum and taxes will be due and owing by the estate.  It is much wiser to name individual beneficiaries.  In that way, the beneficiaries will have the maximum amount of flexibility for withdrawal.

If you name, for instance, you children as the beneficiaries, they will be obligated to start withdrawals from the account by December 31 of the year following the year they inherited the IRA.  The benefit is the fact that they can stretch the amount of time they will have to withdraw the IRA.  The Required Minimum Distribution (RMD) that they will have to take each year will be based upon each of their life expectancies.  In this way, they can stretch the IRA withdrawals over their lifetimes.  They can, however, withdraw more in any given calendar year if they chose.

While gifts and inheritances are not income, and thus not taxable, to the individual receiving the gift or inheritance, this is not true in the case of IRA’s.  Since no income tax was paid initially by the owner of the IRA prior to placing the money into the account, the amounts withdrawn are taxable.  This is true whether the money is withdrawn by the original owner of the account or by a beneficiary.

These rules do not necessarily apply to 401K and other employer established or funded plans.  The manner of distribution will ultimately be controlled by the employer who established the fund.  It is possible that children can stretch out the payments; however, this is not always true.  The beneficiaries may have to transfer his or her share of the inherited 401K into an IRA.  It is important to ask your employer or plan administrator.