Whether you are a recent beneficiary of an IRA or you are planning to leave your IRA to a chosen beneficiary as part of your estate plans, you should know the state and federal rules regarding inherited IRAs. An inherited IRA can result in a substantial distribution to the beneficiary (or beneficiaries), but to make the most of the account funds, you will want to keep some standard rules in mind throughout the estate planning process.
The estate planning attorneys at Galanti and Copenhaver can help you with any of your estate planning needs. Our California attorneys have many years of experience preparing different types of estate plans, as well as handling litigation issues that arise from estate planning issues. Contact us today to set up a consultation with one of our attorneys if you have questions regarding inherited IRAs, or if you have questions about any other aspects of estate planning.
Inheriting Retirement Assets in California
If you are a beneficiary who has been left an IRA in California, it is important to take note that the funds are subject to income tax. This makes sense since it was set up as a tax-deferred account by the decedent (the person who passed leaving you as the IRA beneficiary) and they did not pay income taxes on the money going into the account. There are certain exceptions, but your attorney will be able to advise you whether or not an exception to this rule applies in your case. If the account is a Roth IRA, which the decedent paid into with money that had already been taxed, generally you will not have to pay additional income taxes in that case.
Steps for Beneficiaries of an IRA to Take
Once the beneficiary or beneficiaries of an IRA account have been identified, the next step in the process is to determine the age of the decedent and find out if they had already started taking out the required annual minimum distributions. Next, the beneficiary will want to find out how and when they can begin receiving distributions from this asset.
Withdrawing Funds from the IRA
Typically, there are three options for the beneficiary when it comes to withdrawing these funds. The first option is to withdraw everything right away; however, keep in mind that this may come with substantial tax consequences. Another option is to take everything out more gradually during a five-year span. Finally, the beneficiary may also choose to withdraw funds over the course of their life expectancy.
Generally, if the decedent who named you the beneficiary was not your spouse, you will need to start withdrawing funds from the account by the end of the year after the death of the decent. The withdrawal may even need to occur sooner if the owner of the account was over the age of 70 ½ and had already started taking the mandatory minimum distributions from the IRA.
In most cases, withdrawing the funds as slowly as possible is the best option to save money on taxes. Since this option may not always be available, depending on the plan, it is crucial to receive guidance from your estate planning attorney regarding what options are available to you in your case. As a beneficiary to an IRA, keep in mind that if a charity was also named a beneficiary of the account, the money may need to be withdrawn immediately or within a five-year time period. There may be ways to work around this rule, so if a charity is involved as a beneficiary, it is important to discuss your options with your attorney so that you can work towards the best result for your circumstances.
What Happens to an IRA Account If There is No Beneficiary?
Things can become a bit more complicated when there is no beneficiary named, or in cases where the named beneficiary has already passed away. Typically, in these situations, the IRA funds will then go to the surviving spouse, if there is one, or to the decedent’s estate. If the funds are to go to the decedent’s estate, the matter may go through probate. There may also be certain restrictions regarding when the IRA funds must be withdrawn.
If you have questions regarding an inherited IRA, or you want to know more about the process of estate planning with an IRA account, contact us today at (707) 867-0787 or fill out our online contact form. We can help answer any questions you may have, and also get an estate plan started for you that best suits your needs.