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The rules governing inherited IRAs can be complicated. Here are the major issues.
Transferring inherited IRA assets
If you inherit an IRA from someone who isn't your spouse, your options are fairly limited. You can't roll the proceeds over to your own IRA, treat the IRA as your own, or make any additional contributions to the IRA. What you can do is transfer the assets to a different IRA provider, as long as the registration of the account continues to reflect that the IRA is an inherited IRA and not your own.
If you inherit an IRA from your spouse, you have many more options. You can roll all or part of the IRA proceeds over to your own IRA. You become the owner of the IRA assets, and the rules that apply to IRA owners, not beneficiaries, apply from that point on. If you're the sole beneficiary of the IRA, you can also generally treat the inherited IRA as your own by retitling the IRA in your name. But you aren't required to assume ownership of an inherited IRA. You can instead continue to maintain the inherited IRA as a beneficiary. You might want to do this if you inherit a traditional IRA and you'll need to use the funds before you turn 59 and a half. Distributions from inherited IRAs aren't subject to the 10 percent penalty that typically applies to early distributions from IRAs you own.
Required minimum distributions (RMDs)
Nonspouse beneficiary: Federal law requires that you begin taking distributions, called required minimum distributions, or RMDs, from the inherited IRA after the IRA owner dies. If the IRA owner died after turning 70 and a half and didn't take a required distribution for the year of death, you'll need to make sure to take that distribution by December 31 of the year of death in order to avoid a 50 percent penalty.
Spouse beneficiary: If you roll the inherited IRA over to your own IRA, or treat it as your own, then the RMD rules apply to you the same way they apply to any IRA owner. You'll generally need to begin taking RMDs from a traditional IRA after you turn 70 and a half; no lifetime RMDs are required at all from a Roth IRA. If you don't roll the IRA assets over or treat the IRA as your own, then the same rules described above for nonspouse beneficiaries generally apply to you, except that you can defer receiving distributions until your spouse would have turned 70 and a half.
Special rules--inherited Roth IRAs
Qualified distributions to a beneficiary from an inherited Roth IRA are free from federal income taxes. To be qualified, the distribution must be made after a five-year holding period. The five-year period begins on January 1 of the year the deceased IRA owner first established any
Roth IRA, and ends after five full calendar years. If you take a distribution from an inherited Roth IRA before this five-year period ends, any earnings you receive will be subject to federal income taxes (earnings generally come out last). If you're a spouse beneficiary and you roll the inherited Roth IRA over to your own Roth IRA or treat the inherited IRA as your own, then you'll be eligible to take tax-free distributions only after you reach age 59 and a half, become disabled, or have qualifying first-time homebuyer expenses. You'll also need to satisfy the five-year holding period, but a special rule applies. The five-year period for all of your Roth IRAs will be deemed to have started on January 1 of the year you or your spouse first established any Roth IRA, whichever is earlier.
And speak to a financial professional if...
• You're sharing the inherited IRA with other beneficiaries. This can impact when and how you must begin receiving RMDs from the IRA.
• You don't want or need the IRA funds. You may be able to disclaim the IRA and have it pass to another beneficiary. This must be done in accordance with strict IRA rules.
• Any estate taxes were paid that are attributable to the inherited IRA. You may be entitled to an income tax deduction equal to the estate taxes paid.
Forefield Inc. does not provide legal, tax or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or the accuracy of information provided by other sources. Submitted by Arthur J. Saylor, Saylor Wealth Strategies, 401 Walnut Street, Coshocton, OH 43812 (740-575-4782, www.saylorwealth.com ). Registered Representative, Securites offered through Cambridge Investment Research, Inc. a broker-dealer, member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.
Understanding financial
matters can be difficult because of the jargon used. Becoming familiar with
these ten financial terms may help make your financial picture clearer.
1. Time value of money
The time value of money is the concept that money on hand today is worth more than the same amount of money in the future because the money today can be invested to earn interest. Why is it important? Understanding that money today is worth more than the same amount in the future can help you evaluate and compare investments that offer returns at different times.
2. Market volatility
Market volatility measures the rate at which the price of a security moves up and down. If the price of a security historically changes rapidly over a short period of time, its volatility is high. Conversely, if the price of a security rarely changes, its volatility is low. Why is it important? Understanding volatility can help you evaluate whether a particular investment is suited to your investing style and risk tolerance.
3. Inflation
Inflation reflects any overall upward movement in the price of goods and services in the economy. Why is it important? Because inflation generally pushes the cost of goods and services higher, any estimate of how much you’ll need in the future - for example, how much you’ll need to save for retirement - should take into account the potential impact of inflation.
4. Asset allocation
This strategy means spreading investments over a variety of asset categories, such as equities, cash, bonds, etc. Why is it important? How you allocate your assets depends on a number of factors, including your risk tolerance and desired return. Diversifying your investments over asset classes can potentially help you manage risk and volatility.
5. Net Worth
Net worth is what your total holdings are worth after subtracting all of your financial obligations. Why is it important? Your net worth will probably fund most of your retirement years. Therefore, the faster and bigger your net worth grows, the earlier and more comfortably you will be able to retire. Once retired, preserving your net worth to last through your retirement years is your goal.
6. Five C’s of credit
These are character, capacity, capital, collateral, and conditions. They’re the primary elements lenders evaluate to determine whether to make you a loan. Why is it important? With a better understanding of how your banker is going to view and assess your creditworthiness, you will be better prepared to deliver appropriate information to obtain the loan you want or get a better interest rate.
7. Sustainable withdrawal rate
Sustainable withdrawal rate is the maximum percentage that you can withdraw from an investment portfolio each year to provide income that will last, with reasonable certainty, as long as you need it. Why is it important? Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio.
8. Tax deferral
Tax deferral refers to the opportunity to pay income taxes in the future for investment interest and appreciation earned in the current year. Why is it important? Tax-deferred vehicles like IRA’s and annuities produce earnings that are not taxed until withdrawn. This allows those earnings to compound, further adding to potential investment growth.
9. Risk/return trade-off
This concept holds that, in order to achieve a higher personal investment return, you must be willing to accept greater risk. Why is it important? When considering your investments, the goal is investing to get the greatest return for the level of risk you’re willing to take, or to minimize the risk involved in trying for a given return.
10. Annuity
An annuity is a contract where you pay money to an insurance company in return for the insurer’s promise to pay it back, with interest, in the future. Why is it important? You can supplement other retirement savings with tax-deferred annuity funds, and you can add to your retirement income with payments from your annuity for a fixed period of time or for the rest of your life.
Disclosure Information—Important—Please Review
Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.
Submitted by: Arthur J. Saylor, Saylor Wealth Strategies , 401 Walnut Street, Coshocton, OH, 43812, (740) 575-4500, www.saylorwealth.com . Registered Representative, Securities offered through Cambridge Investment Research, Inc. a broker dealer, member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Saylor Wealth Strategies, LLC are not affiliated.
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Arthur J. Saylor, Financial Advisor. Investment Advisory Services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Securities offered through Registered Representatives of Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC, to residents of: Ohio, Florida, Kansas, Texas and West Virginia. Cambridge and Saylor Wealth Strategies, LLC are not affiliated.
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