Inherited retirement

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gelecek
Posts: 2
Joined: Thu Jan 11, 2018 10:14 pm

Inherited retirement

Post by gelecek » Thu Jan 11, 2018 10:25 pm

Hello,
I am a beneficiary of a recently deceased relative’s (non-spause) employer retirement plan - roughly $18K. Should I cash out and pay tax, or open up a retirement IRA account? If I open a retirement IRA account, can I later roll it over to Roth IRA or keep contributing to it? Would appreciate any pros/cons advice you can share with me. Thank you in advance for your time.

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celia
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Location: SoCal

Re: Inherited retirement

Post by celia » Fri Jan 12, 2018 3:05 am

I'm pretty sure the employer retirement plan would be treated the same as a traditional IRA. [Ask the plan's administrator.] (This assumes all the money in the account is pre-tax.) You cannot co-mingle it with money that you saved in your own retirement plans. You can likely roll it over to an Inherited [traditional] IRA. You will have to start taking Required Minimum Distributions in the year after death at a slower rate than what happens when you turn 70.5 and have to withdraw from your own account. You may withdraw more than the minimum any year, but every dollar withdrawn will be taxed in the year of withdrawal.

You may not contribute to the Inherited IRA nor convert it to Roth. But if you have wages, you can take a withdrawal (and pay taxes on it). Since the money is now in a taxable account, you could then turn around and contribute it to your own Roth. You may contribute up to $5,500 or the amount of your wages each year, whichever is less. If you are over age 50, make that $6,500 or the amount of your wages, whichever is less.

gsmith
Posts: 165
Joined: Sun Mar 21, 2010 1:02 am

Re: Inherited retirement

Post by gsmith » Fri Jan 12, 2018 4:40 am

There are a couple quirks with 401ks, that allow you some options IRAs don't already have.

- If the stock has appreciated greatly, you might be able to take advantage of *Net Unrealized Appreciation (NUA)".*
- You may have the opportunity to ask for the 401k to convert to a Roth under a little known rule.**
- The employer account is likely covered under ERISA, (Labor Dept Rules), while the supreme court has rulled Inherited IRAs do not get bankruptcy protection as retirement accounts. (Not legal advice.... but 401ks generally have stronger bankruptcy protection then IRAs.***

On the downside, the employer plan likely has management fees, and a limited option of investments then a IRA

Cila is right about needing to take required minimum distributions over your lifetime if you don't take it over 5 years.
Check our Schwab's inherited IRA calculator.****

One warning.. Make Sure any IRA rollovers are titled correctly, and it's a trustee-to-trustee transfer.
Once a beneficiary IRA gets a check in their hands, it almost impossible to put back.

* https://www.investopedia.com/terms/n/ne ... iation.asp
** http://figuide.com/this-is-how-you-conv ... h-ira.html
*** https://www.kitces.com/blog/an-inherite ... ourt-case/
**** https://www.schwab.com/public/schwab/in ... iciary_rmd

PS: The plan administrator might be helpful, but I would ask for a "Summary Plan Description" (SPD) regardless.
It's a legal document that describes what options the trustee allows. It doubles as a sedative when read by laypersons.

brother7
Posts: 67
Joined: Mon Mar 27, 2017 4:48 pm

Re: Inherited retirement

Post by brother7 » Fri Jan 12, 2018 5:27 am

How old was the relative when he/she died and what year did he/she die?

Spirit Rider
Posts: 6820
Joined: Fri Mar 02, 2007 2:39 pm

Re: Inherited retirement

Post by Spirit Rider » Fri Jan 12, 2018 5:38 am

It is almost always better to elect lifetime distributions on an Inherited retirement account than it is to cash it out.

If you prefer, it makes tax sense and you have other funds to pay the taxes. You should use one of the quirks mentioned by gsmith to rollover the inherited qualified plan to a Inherited Roth IRA. Once you roll it over to an Inherited IRA that option is lost.

Regardless of an IRA option you take. If you are not currently maximizing your retirement plans and you have no need for this money. You should take extra distributions beyond the RMDs and make matching contributions. This will be a wash tax wise. If the account is pre-tax, distributions will be taxable, but new contributions will reduce your tax liability to offset this. If you choose the Roth IRA route. Do this over five years so their is no tax on the earnings.

There are two reasons for this. First, as mentioned by gsmith, personal IRA accounts have better asset protection. Second, when non-spouse Inherited accounts are inherited by your heirs. They must use your age based divisor as the baseline. However, when they inherit accounts you personally own, they use their own ages as the divisor baseline.

gelecek
Posts: 2
Joined: Thu Jan 11, 2018 10:14 pm

Re: Inherited retirement

Post by gelecek » Fri Jan 12, 2018 2:07 pm

brother7 wrote:
Fri Jan 12, 2018 5:27 am
How old was the relative when he/she died and what year did he/she die?
61

brother7
Posts: 67
Joined: Mon Mar 27, 2017 4:48 pm

Re: Inherited retirement

Post by brother7 » Sat Jan 13, 2018 2:37 am

Unless you're in dire need of money, do NOT cash out and pay the tax.
As the beneficiary of an inherited retirement plan, you have the option to S-T-R-E-T-C-H the RMDs over YOUR lifetime. Why is this a great thing? Because it defers taxes for the longest period of time.

A few key points:
  • Do NOT rollover into your own IRA!
    Do NOT title the IRA in your own name!
    Either of those actions is viewed as a distribution. Not only will the distribution from the plan be taxable but the addition of funds to your IRA will be viewed as an excess contribution and subject to penalty.
  • Title the receiving IRA properly!
    An appropriate title would be "John Doe IRA (deceased), FBO John Smith, beneficiary".
    Such a title contains the three necessary things for the heir to be able to continue the tax deferral:
    • the name of the owner who died (John Doe)
    • some form of IRA
    • a statement that it is "for the benefit of" the heir, or a derivative such as FBO
  • Once the account is in an IRA, distributions can begin. You must take RMDs on a schedule. The schedule depends on whether or not the original owner was already taking RMDs. Since your relative was 61, he wasn't taking RMDs and had not reached the Required Beginning Date (RBD). In that case, you have two options:
    1. The beneficiary can begin taking annual distributions from the IRA using the beneficiary's life expectancy. (See IRS Publication 590-B, Table 1 - Single Life Expectancy) The first RMD must be taken by the end of the year following the year of death. If he died in 2017, you must take the first RMD by 12/31/2018. It's a little tricky calculating the RMD. I refer you to the Source listed below.
    2. The beneficiary can distribute 100% of the inherited IRA by the end of the fifth year after the owner's death on any schedule you want.
    Option 1, commonly referred to as the Stretch IRA, is the best way to maximize the benefits of tax deferral.
Source: Bob Carlson's Guide to Inheriting IRAs

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Inherited retirement

Post by aristotelian » Sat Jan 13, 2018 9:12 am

OP, it would be good to know your tax bracket. Generally you want to take RMDs, since you can always take more later. If you are in a low tax bracket, there would be little downside to cashing out now if you can use the cash, but RMDs would ensure the money would come out at the lowest rate, then you can decide later the right time and plan to fully cash out.

Celia is correct, you cannot mingle Inherited IRAs with other IRA/401k or even one Inherited IRA with another.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Inherited retirement

Post by Spirit Rider » Sat Jan 13, 2018 1:12 pm

brother7 wrote:
Sat Jan 13, 2018 2:37 am
Do NOT rollover into your own IRA!
Do NOT title the IRA in your own name!
Title the receiving IRA properly!
I understand the intent, but while the first action is an irrevocable error.

A properly designated Inherited account that is incorrectly titled can be properly titled by corrective action later.

The beneficiary does not title the account. Titling of the account is done by the custodian based their own policies. Which can and do vary from custodian to custodian.

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