This post The IRS Has Its Eyes on these 25 Million Accounts… appeared first on Daily Reckoning.
There are about 25 million IRA accounts in the United States right now, owned by more than 20 million individual citizens.
So it’s quite likely that you or someone you know will inherit one of these accounts at some point in your life.
What should you do with the money?
Maybe pay off some debts, treat yourself to a special vacation, or put it away for retirement.
Before you starting spending any of that new wealth, understand that the IRS already has its eyes on a piece of it.
The folks there created required minimum distribution (RMD) rules to make sure there’s a source of cash flowing into their coffers each year.
Generally, those rules require that the IRA owner start taking RMDs the year after reaching age 70½.
And how they treat the inheritance depends on your relationship to the deceased, your age, and the age of the deceased.
If it was your spouse, you have a lot of flexibility with the spousal election…
Suppose you’re under age 59 and a half
You could retitle the account as an inherited IRA and remain the beneficiary (also be sure to name your own beneficiary).
That way you’ll keep the tax shelter and could tap the account without paying the 10% early distribution penalty. Income tax will still be due on any pre-tax funds you withdraw.
You won’t have to worry about RMDs until the year your spouse would have been 70 and a half. That’s when you’d use the IRS’ single life expectancy Table 1 to calculate the annual required distribution amounts.
After you reach 59 and a half, when the 10% penalty no long applies, you should consider rolling the money into your own account.
What if you’re over age 59 and a half?
Make the inherited IRA your own. By rolling the account into yours, you won’t have to take RMDs until you turn 70 and a half. Meanwhile, if you need the money, the 10% IRS’ early distribution penalty will not apply. Of course, you’ll still have to pay income tax on any distributions.
This would also be a good time to review your listed beneficiaries.
And if you’re over 70 and a half?
You’re at the age when you are required to take RMDs. But how old was your spouse? If older than you, you should roll the IRA into yours. That way the taxable distributions will be lower.
And if younger than 70 and a half, you might want to temporarily keep the account as an inherited IRA. Then in the year your spouse would have turned 70 and a half, you should transfer the account into your IRA.
You’ll use the IRS’ Uniform Lifetime Table to calculate your RMDs on the combined accounts.
The advantage here is that the Uniform Table results in lower RMDs than the Single Life Expectancy Table, which you’d have to use if you had kept the account as an inherited IRA.
What you do could …read more
Source:: Daily Reckoning feed
The post The IRS Has Its Eyes on these 25 Million Accounts… appeared first on Junior Mining Analyst.