Ask the Advisor: July 2016

Ask the Advisor: July 2016

I Inherited An IRA From My Dad - How Does That Affect My Taxes?

Q: I inherited an IRA from my dad worth roughly $232,000.  I’m 65, and receive Social Security.  Can you tell me what effect this will have on my taxes?  Will it cause my Social Security benefits to be reduced?

A:  The IRA you inherited won’t reduce, or cause the Social Security Administration to withhold your benefits.  Reductions to benefits occur when you are under full retirement age and receive wages in excess of annual exempt amounts.  Inherited assets like an IRA will not cause your benefits to be reduced, but distributions from the IRA may possibly subject your benefits to taxation, and the higher income you receive may potentially subject you to Medicare Part B and Part D premium surcharges if your income is above $85,000 (individual) or $170,000 (couples).

The worst mistake you can make is simply withdrawing the money and then asking “OK, now what do I do?”  The rules for inherited IRAs can be tricky, especially for non-spouse beneficiaries like you.  Those rules differ depending on whether you received a traditional IRA, or a Roth.  With an inherited IRA all movement of the money must be from one IRA custodian to another, “a trustee-to-trustee” transfer.  In addition, you will need to retitle the IRA to include the deceased original owner’s name and you as the beneficiary.

The beneficiary named on the form on file with the custodian of the IRA, the financial institution which holds the funds for safekeeping, controls who inherits and the ability to stretch out disbursements.  If you were named directly as the beneficiary, you will need to start taking distributions from the account by December 31 of the year AFTER inheriting, otherwise you will be required to withdraw all of the money in the account within five years.

If you otherwise fall under rules that allow stretching out the distributions, you must take minimum distributions from the account based on your own life expectancy.  The withdrawals will be taxable, but the rest of the money can be spaced out over your own expected life span, which thus allows you to continue to receive the tax-deferred growth in a traditional IRA or tax-free growth of a Roth.  

Please note:  If an estate was named as beneficiary, then different rules apply! You have several options, and making the right choice has a big impact on how much you will owe in taxes.  Find a professional tax or financial advisor with expertise in inherited IRAs.  TSCL strongly urges you NOT to do anything, until you have all the details and know what particular set of rules apply to you.  The above information is not tax advice, so please consult your professional tax advisor.  To learn more about the tax rules see “Distributions from Individual Retirement Arrangements (IRAs),” IRS Publication 590-B.