What to do with Inherited IRA?

Submitted by Ran White on Wed, 2016-02-10 19:14

Hi everyone, I am about inherit around 36k (child of deceased parent), and the savings account it was under gave me 2 options:

1.) Send a check that will be subject to a 20% fed witholding.

2.) Designate it to a “inherited” IRA.

I figure option 2 is the best move. However, I’m trying to figure out what advantages I could do by having in there? I’m under 30, and I would not like to wait until I’m 59.5 to start withdrawing. I’m thinking about using this for purposes like traveling, down payment on my first home in the future, etc.

The only benefits I could see by having this IRA is to not be taxed heavily all at once. I can disperse and take out the minimum per year I need to take out.

Can someone shed on me better light than this? I’m new to this whole realm, I dont even know where to start my inheritance ira (fidelity? charles schwab? Or my local credit union?).

Thanks to anyone that can help out!



Submitted by Alan - IRA critic on Wed, 2016-02-10 21:45

  • Apparently, you inherited a qualified plan like a 401k or 403b. If you do not want to stretch it out over your lifetime (RMDs would start out at less than 2% of the 36k balance) you could take out more larger distributions (but not a lump sum since that would spike your tax rate) and use them to subsidize your own retirement savings which would not have RMDs until age 70.5. Or you could spend part or all of it. The only thing you cannot do that would result in an expensive penalty is to fail to take out your annual RMD. Another option if the parent passed under age 70 is the 5 year rule under which there is no annual RMD, but you have to drain the account by the end of the 5th year. So generally, I would do a direct rollover to an inherited IRA, and then decide from there how fast to take distributions from the inherited IRA.
  • Schwab, Vanguard or Fidelity would all be good places to open an inherited IRA and let them help you with the direct rollover. That will avoid any current taxes or withholding. Be sure to name your own beneficiary, and also be careful NOT to receive a distribution (check payable to you personally) unless you need the money because you CANNOT roll over a distribution from a non spouse inherited IRA.

Submitted by Ran White on Wed, 2016-02-10 22:19

It was a thrift savings plan (says “is designed to closely resemble the dynamics of both private sector 401(k) and Roth 401k).From what I believe, they will send the whole amount into the inherited IRA I setup, which I wanted to sit up as cash until I feel safe investing in funds/etfs’,etc.Can you explain a bit more what you mean by:

 “Be sure to name your own beneficiary, and also be careful NOT to receive a distribution”.

Do you mean to make sure I designate a beneficiary of this inherited IRA I’m about to open, and not to request a check? Cause I thought I could open up an inherited ira, have all the money sent there,and withdraw from it at least once or many times per year to cover the annual RMD? They were also under 70. Thanks.

Submitted by Alan - IRA critic on Thu, 2016-02-11 00:09

You need to name your own beneficiary who would receive your inherited IRA should you unexpectedly pass.With respect to taking the distributions, that is OK but is irreversible. That is you cannot receive a check, then change your mind and try to roll the funds back into the inherited IRA. If you receive a check payable to you you will have to pay taxes on the full amount. Your annual RMD will be very small, but you can take out as much as you like as long as you know it will be taxed, and you will lose the benefits of continued tax deferral.

Submitted by Ran White on Thu, 2016-02-11 01:45

ok, great,I have a beneficiary, and let me see if I understand correctly. I can designate them to send this lumpsum to a inheritance ira (give them the account information), and then it can sit up as cash. Afterwards, I need to withdraw at least 2% before the 31st, which will be subject to being taxed (and any amount I withdraw so on)? Once it arrives in the inherited ira, I can receive payment by check or direct deposit correct? Just making sure I understand correctly? Seems to me like the reason to  use this method is to trade funds, etc, and grow your money as long as you can without the huge taxation of taking it out all at once.

Submitted by Alan - IRA critic on Thu, 2016-02-11 02:11

Basically, yes. The 2% is just an estimate. Your first RMD divisor is based on your age of 12/31 of the year after the year of IRA owner’s death. You get that divisor from Table I in Pub 590 B. Once you get the initial divisor, for each year after your first RMD year, the divisor is reduced by 1.0.

Submitted by Ran White on Thu, 2016-02-11 06:58

Thanks alot Alan. You’ve taught me some great information about this. My last question is, do I have to name the inherited ira I setup in a specific way (e.g. “John Doe’s deceased son’s inherited ira”, or similar? Just was curious to know if that plays a role for anything?

Submitted by Alan - IRA critic on Thu, 2016-02-11 15:53

Both your name and the decedent’s must be listed, but the order does not matter. For example, “Jason Doe as beneficiary of John Doe” , Your inherited IRA custodian will probably have a preference according to their processing platform. The DOD can be shown but does not have to be.

Submitted by S M on Tue, 2016-02-23 18:32

Inheriting IRA from mom. How do I name this to do the stretch and is it held under my SS# or mom’s or both?  Thanks!

Submitted by Alan - IRA critic on Tue, 2016-02-23 18:46

You have to submit a copy of the death certificate and other papers for the IRA to be retitled as a beneficiary IRA. The SSN will be changed to yours. See prior post above for titling options. The stretch is automatic using your life expectancy from Table I in Pub 590 B. You get the divisor based on your age as of 12/31 of the year following her year of death, then each year after the first RMD year, you reduce the divisor by 1.0. If there are other beneficiaries on the IRA now, you have to establish separate inherited IRA accounts by 12/31 of the same year above in order to use your own life expectancy.

Submitted by S M on Tue, 2016-02-23 19:43

Super helpful! 

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