A: There are a several key items to consider.
The writer is a Retirement Plans Specialist at Fenimore Asset Management in Cobleskill, NY.
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 percent 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.
Due to the complex Inherited IRA rules, one size does not fit all. Please speak with an investment professional and discuss what might be right for you. As always, I recommend including your accountant or tax preparer in the decision before you make a transaction.
Fenimore Asset Management is an independent investment advisory firm located in Cobleskill, NY since 1974. Fenimore’s affiliates are the Fenimore Private Client Group & FAM Funds – offering separately managed accounts and mutual funds. In-depth research. Insightful investing.
