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Mistakes to avoid when inheriting an IRA

On Behalf of | Aug 4, 2023 | Estate Administration

Inheriting an individual retirement account can be confusing. Those who find themselves new owners of these retirement assets often find themselves simultaneously considering planning for their own New Jersey estates, current finances and taxes. Making the right decision about this asset can save you money.

What is an inherited IRA and how it works

An inherited IRA is a retirement account that someone opens following the original owner’s death. These are also called inherited IRAs because owners must name beneficiaries to pass on their assets. Anyone can inherit an IRA, but how you handle it depends on your identity. For example, the spouse of the original owner will treat the inherited asset differently than someone else, as the estate planning implication will be different.

Seven important considerations when inheriting IRAs

Beneficiaries will encounter many different rules. Consider the following:

  • Spouses get the most choices when reinvesting their money
  • Know options on when to take your money
  • Ensure the year-of-death distribution is met
  • Take the tax break
  • Pay attention to beneficiary forms
  • Get help when drafting trusts
  • Use Roth IRAs to avoid tax issues

Educate yourself on the rules

Take the time to discover and understand all of the rules involved with inherited IRAs. Although IRAs don’t have to go through probate because they have beneficiary designations, you’ll still want to read the myriad rules involved so you don’t make a costly mistake. The IRS website is an excellent place to start.

Nevertheless, you’ll probably still have questions about how to handle your inherited IRA. Consider working with a professional like a financial advisor. You’ll want to ensure that the one you choose to provide you with available options has experience with inherited IRA rules so you can make the best possible informed decision.