IRAs are a well-known form of retirement account. What may not be so well known is that an IRA can be inherited, in much the same way as other assets, when the IRA holder passes away. If you inherit an IRA from your spouse or a parent, you have several options; you can keep the IRA, you can convert it to another retirement account, or you can cash it out. Cashing out the IRA in a lump sum lets you get the money all at once, though you'll have to pay taxes on the full amount. Some financial advisers say it's wiser to spread out the tax burden by taking your IRA distributions over time.
Items you will need
- Death certificate
- Driver's license or other proof of identity
Contact the bank or institution where the IRA is held; let them know that the person who owned the IRA has passed away, and that you're the beneficiary. You'll need to provide proof of your identity, and a death certificate, to establish this. Once you've proven that you're the beneficiary of the IRA, you should find out more about its status, including its value, and whether the holder had begun taking payments from it. The balance of the IRA will be transferred into a new account as an inherited IRA.
Visit an accountant or tax professional and tell him about the IRA that you've inherited. When you cash out the IRA, you will owe taxes on the amount you receive; your accountant will help you to calculate the total amount of taxes due, and may be able to help you avoid penalties due to unpaid back taxes on the money, if necessary.
Go back to the bank and tell them that you'd like to cash out the inherited IRA. You'll likely have a few different options on how to receive the money, including a cashier's check, having it deposited into a savings or checking account at the bank, or a wire transfer into the account of your choosing. If you're having the money transferred to another bank, you'll need the account number and routing number for the account you want the money transferred to.
Pay the taxes due on the money you get from the cashed-out IRA. Depending on the amount, you may want to make a tax payment prior to filing your taxes, to ensure that you aren't fined or otherwise penalized for underpayment. The IRA income should be listed on your tax return regardless of whether you make an early payment.
- You're allowed to claim estate taxes paid on a cashed out IRA as a tax deduction. Claiming this deduction will help offset some of the taxes you must pay on the money you receive from the IRA.
- An inherited IRA must be cashed out or transitioned by December 31st of the year you inherit it, to avoid IRS penalties.
- When cashing out an inherited IRA, you must pay income taxes on the full amount, and may have to pay unpaid taxes on previous distributions as well. Consult a tax professional before cashing out an IRA, as some taxes and fees may cost you as much as 50% of the total value of the IRA.
- USAA: What to Do If You Inherit an IRA
- Fidelity Investments: Inheriting an IRA or Retirement Plan Assets from a Non-Spouse
- Bankrate: You -- Not IRS -- Should Benefit from Inherited IRA - Page 2
- New York Life: Inherited IRAs
- Morningstar Advisor: Estate Planning Q&A with Natalie Choate - Inherited IRAs
- Forbes: Investment Guide - Tax Traps
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