Inherited IRAs: Know Your Responsibilities

By Peter Sweetser, Retirement Plans Specialist 

If you are a son, daughter, brother, sister, or close acquaintance to an IRA owner who has named you as their beneficiary, then it is vital that you understand the contingencies associated with Inherited IRAs. With Inherited IRAs you are not able to incorporate the assets you inherit into your personal IRA account so you must be cognizant of your three main distribution options.

One mandatory distribution option is the life-expectancy method which requires you to withdraw certain minimum amounts — based on the previous year’s year-end balance divided by the life expectancy number the IRS provides— starting the year following the year of the owner’s death. Failure to withdraw the minimum amount before the year’s end will result in a 50% penalty instituted by the IRS in that year’s tax return. Another option is the five-year method which is only available if the owner of the IRA died before they reached the age of 70.5. The five-year method requires that you withdraw the entire account by the end of the fifth year of the date of the deceased and there are no minimum withdrawal requirements. The third option is a full distribution in which you withdraw the full amount of the account. It is important to note that this method is subject to federal income tax based on your individual tax bracket.

There are more details and options to consider, so please call me at 800-453-4392, option 2 or e-mail sweetser@famfunds.com to discuss your situation. I also recommend that you include your accountant or tax preparer in the final decision.

Please see Fenimore Disclosure.