Did you know that you can inherit an IRA? Before you get carried away, you should know how to handle it first for the best outcome. It’s possible to lose a good chunk of your new savings by making a wrong move that will practically waste your inheritance. Maggi Tax Tampa is here to show you the biggest mistakes to avoid and what to do when you inherit an IRA. For expert financial advisors near you, schedule your consultation with us today!
1. Withdrawing the Entire IRA Savings at Once
Money is money, but getting greedy can cost you. Just like any other retirement savings account, pulling funds too early or all at once has its consequences. Inherited IRAs are no different. When you take out your inherited IRA as a single lump sum, you will be faced with serious tax penalties. Plus, much of the inheritance you claim will count towards your regular income, placing you in a much higher tax bracket which you don’t want.
The Solution:
If you want to start claiming your inheritance sooner rather than later, you can opt for a 10-year distribution plan. Keeping your withdrawals low over a longer period of time can maintain your position in a lower tax bracket while you enjoy a little bit of extra income.
2. Failing to Keep Up With Your RMDs
Even if you have the patience, your inherited IRA may require you to take out minimum withdrawals to avoid penalties, sometimes referred to as Required Minimum Distributions or RMDs. While you are expected to wait until retirement age to withdraw from your personal retirement accounts, inherited IRAs have their own set of rules, and overlooking them can cost you greatly.
The Solution:
Meet with a tax advisor or financial expert to help you come up with an RMD schedule for your inherited IRA to ensure that you’re meeting your quota for withdrawals.
3. Contributing to the Inherited IRA Account
Whether it’s an honest mistake or you’re in the mindset of maximizing your inheritance, you might find out the hard way that contributing to an inherited IRA can actually backfire. That’s because the moment you add on to your inherited IRA, it stops becoming an inheritance and starts being your personal IRA account. The problem with that is once an inherited IRA is transferred to your direct ownership, all of that money becomes taxable.
The Solution:
To maximize your savings without penalties, consider opening up your own IRA account and contributing to that one, instead. That way, you can have two retirement savings accounts side-by-side without either one interfering with the other.
4. Overlooking the Finer Details On Your Documents
A silly mistake to make that won’t be so funny later on is overlooking the smaller details on your documents like the spelling of names or the numbers on dates. Properly titling an inherited IRA is also tricky since it requires a very specific format consisting of the name of the deceased, the date of death, and the beneficiary’s name in that order along with added tags like “IRA” and “FBO” where needed. So many things can go wrong with the construction of the document that can incur unwanted complications.
The Solution:
Allow a tax professional to handle your documents for you. An expert will know exactly how to format your inherited IRA paperwork to ensure that you receive your assets with minimal complications.
Inherited An IRA? Protect Your Assets By Meeting With Maggi Tax!
If you’ve inherited an IRA, make sure you’re handling it the right way by reaching out to Maggi Tax Tampa for a consultation. Call us at (727) 799-1701 or schedule an appointment online to get started on securing your assets!
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