If you have an IRA, SEP IRA, SIMPLE IRA, or similar retirement plan, you have no doubt been made aware that you must take required minimum distributions (RMD) from the plan when you reach the age of 70 ½. You may withdraw more than the RMD, but withdrawing less carries a heavy tax burden: a 50% tax penalty on any part of the RMD you fail to withdraw. This penalty puts teeth in the "required" part of the phrase.
When you receive your RMD, it will be taxed to you as ordinary income, with the exception of any portion on which you previously paid tax. Because distributions are treated as ordinary income, they may bump you into a higher tax bracket or cause related problems, such as raising the amount of your Social Security benefits that is taxable, or causing your Medicare premiums to go up. If you need the income your RMD would provide, that's one thing. But what if you would prefer to forgo that extra income and the tax headaches it could bring? Is there an alternative to taking an RMD that won't result in penalties?
If you inherit a retirement account, particularly a traditional IRA or a Roth IRA, you have some decisions to make. Unlike some inherited property, which you can just set aside until you are ready to deal with it, retirement accounts require timely action on your part, while you may still be dealing with the grief of the loss of the person whose account you inherited.
Fortunately, you don't need to take that action on your own. An estate planning and probate attorney can give you the advice you need in order to make those decisions, and the guidance you require to carry them out. In the meantime, here are some general basics to help you understand your options.
What you can (or must) do with your inherited retirement account depends primarily on three factors: whether the IRA is traditional or Roth; whether or not you were the spouse of the owner, and whether or not the owner had reached the age of 70 1/2 w… Read More