I regularly meet with clients who inherit a loved one’s IRA (non-spouse). If that applies to you, you may be asking similar questions. Mainly, what should you do with it? Well, there are basically three options:
- Withdraw all of it. Unless it’s a spouse’s IRA in which case you can defer it until your own retirement age you can withdraw one hundred percent of the account. I would tell you this is my least favorite and here’s why. Simply put it’s the tax. You have to pay tax on all of the money that you withdraw. There’s one exception to this is, and that is if it is a Roth IRA you are inheriting. Now, if you truly “need” this money like you are out of job and have bills to pay, then go for it. However, if it is more like, “I want a new car” or “I want to remodel our basement” then it would be unwise to take this option.
- Withdraw some of it. Basically, you could take a withdrawal of twenty percent per year over five years. This is a slightly better option because it spreads out the tax over multiple years.
- “Stretch the IRA”. This is my favorite option as it is the best for deferring taxes and improving your own retirement picture while avoiding a sizable tax bill. Here you are only required to withdraw or distribute a small amount every year based on your current age and life expectancy essentially “Stretching” it out. Now, you’re only paying tax on the small withdrawal each year. Over time the Inherited IRA’s growth could outpace the rate at which you distribute the account. This takes full advantage of the IRAs tax sheltering potential…kinda like licking the plate after eating the whole piece of pie!
Be aware there have been rumblings from Washington over the past several years that the Stretch IRA option maybe going away and quite possibly here in 2017.