Citi Personal Wealth Management
Individual Retirement Accounts (s) are a common way to save for retirement. They can also be part of a legacy you leave for your loved ones.
But be warned: inheriting ancan be fairly complicated. If the original owner and the beneficiaries don't follow the rules carefully, the tax advantages could get squandered and you may unleash a large tax bill all at once. Indeed, this is one occasion when a little help from an estate-planning attorney or tax professional could prove invaluable.
If you have an, you probably listed one or more beneficiaries. Even if you're married and name your spouse as a beneficiary, it's generally a good practice to name a secondary, or contingent, beneficiary in case your spouse dies first.
If you don't name any beneficiaries, yourcan become part of your overall estate and will likely go through probate. That can be time-consuming and expensive, depending on which state you live in and whether you have a will. Moreover, if your is probated along with the rest of your estate, it may have to be liquidated in as little as five years, possibly triggering a big tax bill. Remember, even after your death, income taxes still have to be paid on withdrawals from your Traditional .
In order to eliminate the income tax burden for their beneficiaries, some people convert their Traditionalto a Roth . Income taxes will be owed on the taxable sum converted, but once the money is in a Roth, it can grow tax-deferred thereafter, and qualified withdrawals are tax free. A qualified withdrawal is generally a distribution made after a five-year taxable period of participation, and is either taken on or after the date you reach age 59½, attributed to a disability, or made after your death. Unlike a Traditional , Roth s aren't subject to the rules that require minimum annual distributions starting in the year after you turn age . That means as the original owner, you can keep the Roth intact for your beneficiaries.
What happens if you inherit a Traditional or Roth
Surviving Spouse. If you are the surviving spouse and sole beneficiary, you may have the option to delay withdrawals from a Traditional to a later date by transferring the account to your name. If you aren't yet , the money can stay in your account until you are required to take minimum distributions. Meanwhile, if you inherit a Roth from your spouse, you have the option not to take withdrawals during your lifetime if you wish.
Non spouse Beneficiaries. The rules are more complicated for non-spouse beneficiaries, such as children and grandchildren. Whether it's a Traditional or Roth, you have to start taking distributions by December 31 of the year after you inherit the . However, you can choose to receive the money gradually using a distribution schedule based on your life expectancy. This is known as the stretch and can extend the period of tax-deferred or tax-free growth, possibly for many decades over several generations. For the stretch to work, you have to follow the tax rules carefully.
Please make sure you consult with a tax advisor and financial advisor before taking any action on an, including any retitling.
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