October 08, 2020

You Inherited an IRA: Now What? Ep #14

18 minutes

What do you do if you inherit your Mom’s IRA? What if it’s a Roth IRA? How does it have to be distributed? What’s the best way to handle the resources? In this episode of Retirement Made Easy, I’ll let you know how you can handle an inherited IRA (and how the SECURE Act comes into play).

You will want to hear this episode if you are interested in...

[1:43] How to handle inheriting your Mom’s IRA
[5:27] Should you take a withdrawal?
[6:30] The impact of the SECURE Act
[10:01] Is inheriting a Roth IRA different?
[14:11] Other important factors to consider
[15:48] Why you can’t transfer to your own IRA

How to handle inheriting your Mom’s IRA

If your mother passes away and you’re the beneficiary of her IRA, where do you start? I recommend that you contact the custodian of the IRA (Fidelity, Charles Schwab, i.e. whatever name is on the statement). You call the 800 number and let them know that your Mom passed away and ask what your next steps are.

They’ll likely give you some forms to submit to them with a copy of the death certificate (I always recommend getting a few extra copies of the death certificate—you’ll probably need it). When you submit the paperwork, they open a Beneficiary IRA in your name. At that point, the assets are transferred from your Mom’s IRA to yours. Be absolutely sure that you’re designating beneficiaries for your account.

These forms are tricky and a pain-in-the-neck. If you have a financial advisor, get their help to make sure you’re handling it correctly. It often requires a medallion signature or notary stamp. Once it’s set up, you’ll be able to invest this account however you decide. Since it’s an IRA you can change the investments to suit your goals.

How withdrawals from an inherited IRA work

Do you have debt you want to pay down? Maybe you want to pay off your home earlier? An inherited IRA brings more resources to the table that you can draw from to pay off other debt such as school loans, auto loans, or credit cards. You can take a withdrawal from this account, and will simply pay income taxes on the withdrawal(s). If you inherit a Roth IRA, any withdrawals are absolutely tax-free. The nice thing is, if you’re under 59 ½ the early withdrawal penalty does NOT apply to inherited IRAs. But if you take it out of your own IRA, you get hit with the 10% early withdrawal penalty.

How the SECURE Act changed everything

If you inherited your Mom’s IRA in 2019 or earlier, you’d have what’s called a Stretch IRA. You’d have to take required minimum distributions throughout your lifetime. You’d be forced to take money out, 3–4% a year, sometimes a lot higher. That all changed with the SECURE Act.

If you inherit an IRA in 2020, you have 10 years to take all of the money out of the account and pay taxes on it. Anything that’s left after 10 years must be completely withdrawn. When and how you distribute it is completely up to you and your financial advisor. Your situation will dictate what makes the most sense.

Other important factors to consider

One important factor to remember is that you may likely inherit other assets as well (checking, savings, CDs, home, etc.). Luckily, as long as your mother listed beneficiaries, the account will NOT go through probate. Secondly, you can’t transfer or move your Mom’s IRA into your own IRA. They must be kept separate. It’s how the government tracks the ten years that you have to remove the money from the IRA.

Listen to the episode as I share some client examples and ideas for how you can distribute the money—or continue to let it grow.

Resources & People Mentioned