The greatest wealth transfer in history is under way. An estimated $30 trillion in assets will pass from Baby Boomers to Millennials and all cohorts in between. A large percentage of this wealth is held in individual retirement accounts and company retirement plans.
Transferring wealth by beneficiary designation is a simple process but does come with several rules and regulations once the money has been moved to your name. The transfer from one IRA to another by beneficiary designation is called an inherited IRA.
If your spouse passes away, you have a few options. You can leave the IRA as is and name yourself as the account holder, roll the assets into your IRA, or remain as the beneficiary. Once you decide on how to treat the IRA, you can remove the assets all at once, over your life expectancy or within five years if your spouse was under the age of 70.5. If your spouse was over the age of 70.5, you can take a lump sum distribution or distributions over your life expectancy. As the new account holder, you can also make contributions to your new IRA.
If you’re the non-spousal beneficiary, you cannot treat the IRA as your own and you must inherit it as a beneficiary meaning you can’t make contributions to the account or rollover the assets into your own IRA. Once the account has been transferred as an inherited IRA, you can remove the assets over your life expectancy, over a five-year period, or as a lump sum if the owner was under the age of 70.5. If the owner was over the age of 70.5, you can take distributions over your life expectancy or as a lump sum.
Whether a spouse or non-spouse beneficiary, any distributions from the IRA will be taxed as ordinary income. If you’re the spouse and you treat the IRA as your own, you’ll have to pay a 10% penalty on the distribution if you’re under the age of 59.5. The 10% penalty does not apply to non-spouse beneficiaries regardless of age.
As the new owner of your inherited IRA you can name your own beneficiaries. The assets inside the IRA can be traded without taxation giving you the option to keep the existing investments or moved to ones based on your investment goals, risk tolerance and time horizon.
There are a few more inherited IRA rules than those listed in this blog. Your advisor should be able to assist you with all the rules and regulations for inherited IRAs as they relate to your unique situation. If you do inherit an IRA, you’d be wise to seek financial and tax advice before making any significant changes to the account.
but whoever drinks the water I give them will never thirst. Indeed, the water I give them will become in them a spring of water welling up to eternal life.” ~ John 4:14.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. For more information on financial planning and investment advice, please visit www.parrottwealth.com. Thank you!
July 30, 2017
 https://www.cnbc.com/2016/11/29/preparing-for-the-30-trillion-great-wealth-transfer.html, by Anna Robaton, 11/30/2016
 https://www.irs.gov/publications/p590b/ch01.html, accessed 7/29/2017.
 https://www.irs.gov/publications/p590b/ch01.html#en_US_2016_publink1000230538, accessed 7/30/2017.
 http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules, accessed 7/30/17.