“Concentration Comes Out of a Combination of Confidence and Hunger” -Arnold Palmer

When a loved one dies and leaves money to beneficiaries, It is vitally important to know the rules.  For example, if the money you inherit is inside of an IRA account, you better consult a professional before doing anything.  IRAs can be wonderful tools for saving for retirement.   If you’ve inherited an IRA, or if you will in the future, here are four things you should be aware of.

First, spouses have different requirements than non-spouses on inherited IRAs.  If you’re a spousal beneficiary, you might not have a required minimum distribution, even if you’re over age 70 ½ yourself.  It all depends on whether or not your spouse had reached age 70 1/2 in the year of death. Was their birthday after June 30th?  For example, if their birthday was between January 1st and June 30th , the first year of distribution would have been required at age 70.  July 1st through the end of December delays the requirement until the following year at age 71.  As a spousal beneficiary, you have the option of rolling over your inherited IRA into one under your own name.  Keep in mind that depending on your age, this may or may not be a wise move.  Check with your financial advisor or give us a call to double check.

Second, lump sum distributions of the funds from an inherited IRA are always available.  As long as you’re not dealing with some illiquid asset in the IRA, you can take the funds out in one big chunk if you want.  And even if the heir isn’t yet 59 ½ years old, there’s no penalty for withdrawing the money like there would be for your own traditional IRA.  One caveat – you can get your hands on the money, but any funds you withdraw will be added to your income for that year and taxed at ordinary income rates.

Third, there is a 5-year rule on distributions on certain inherited IRAs. If the original account owner died before their required minimum distribution age, the beneficiary has the option to let those inherited IRA assets stay in the account for up to five years after the year of death.  At that point, the entire sum has to be distributed.  But this 5-year delay can allow you some time to do some tax planning, which can really be helpful if you expect your income will drop substantially before the five years is up.

Finally, if you inherit a Roth as a non-spouse beneficiary, you actually have required minimum distributions.  You may have heard that Roth IRAs do not have required minimum distributions (RMD), but this is true only for the owner and his or her spousal beneficiary.  Too many people get this wrong.  If you miss an RMD from the Roth, there’s a 50 percent penalty on the missed amount. The good news is that the funds that you as a beneficiary are required to withdraw from a Roth that is at least 5 years old are not subject to any income tax at all.

Inheriting any money at all is always a nice thing.  But knowing what you can and cannot do once you get the money may allow you to keep just a little bit more.  It’s too easy using the money to pay off debt, student loans, medical bills, taking a vacation, making a new car purchase, or paying down your mortgage.  All tempting uses of the money you inherit, but we ask you to consider the compounding effects of leaving the money fully invested.  This will pay income to you later and for years to come so that you don’t run out of money when you need it most during those last years.  Give us a call to discuss your options before making a decision with your newly inherited funds.


Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com

Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”