Fairly frequently, an IRA holder may not live to see the benefits of the IRA they had put away. In some cases, those IRAs are transferred to their beneficiaries.

If you become the beneficiary of an IRA, here a few rules to remember so you can choose the option that might be best for you.

You Can Always Elect for a Lump Sum

As a beneficiary of an IRA, one of the special benefits you can enjoy is withdrawing the entire amount into a lump sum. Even if you are not of retirement age (59 ½) ,you are eligible to withdraw. What also makes this option attractive is that unlike most early withdrawals from IRAs, an inherited IRA withdrawal will have no penalties or fees.

Spouses Get a Special Option

It’s common for spouses to be named as beneficiaries, so the rules around inherited IRAs for surviving spouses outline special options not afforded other beneficiaries. One of those options is the ability to combine the inherited IRA into his or her own IRA, thus pooling all the retirement funds into one place. The surviving spouse is not required to do this, but it is an appealing option and sometimes the most prudent.

The Stretch Option

If you are not a spouse, you still have the option of the “Stretch” IRA withdrawal. This requires you to take a certain amount out every year until the IRA is exhausted. This amount depends on both the value of the account, and the life expectancy of you, the beneficiary holder. If, as an example, you are expected to live 20 more years, than you will receive 1/20th of the amount every year until the account is exhausted. Of course, your life expectancy varies on your own personal health and situation, but the IRS does have a life expectancy chart for beneficiary purposes.

The Five-Year Rule

If you wish, you may allow the funds to remain in the IRA up until five years after the IRA holder’s death. Some people opt for this choice because it gives them time to plan for the best possible tax outcome.

Need Help With Your Inherited IRA?

Remember, there are tax implications for the different forms of distribution, which you should discuss with a tax professional. There also are more complex rules and limitations than described above to your inherited IRA, and other things to consider to find the best option for tax planning. If you are the beneficiary of an IRA and need guidance, and we can help point you in the right direction. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.