What Do I Do with An Inherited IRA?

Investopedia’s article, “What to Do With Your Inherited IRA,” looks at the differences between a traditional IRA and a Roth IRA, what it means when you inherit them and how to navigate both.

IRAs come in two flavors: pre-tax and post-tax. A pre-tax retirement account means the money that goes into the IRA has not yet been taxed. This is a traditional IRA, where you add money to the account and can deduct that money on your tax return. When you withdraw money for retirement, you’ll then pay tax on the money. However, a Roth IRA is a post-tax retirement account. You contribute after-tax money to the account, and when you take money out in retirement, it is tax free.

If the decedent is over the age of 70½, he was required to take minimum distributions (RMDs), which will be taxable. Anytime an RMD is missed or is not taken in full, the IRS will impose a 50% penalty on the amount not removed from the account. If you have inherited a Roth IRA and the RMDs haven’t started for the decedent, the IRS has already collected the tax on the money in the account. The money won’t be taxed again, when it is withdrawn.

If you are a spousal beneficiary, you have a few more options. If the decedent started the required minimum distributions, you have four options:

  1. Roll IRA into Your IRA. When this money becomes your IRA, you follow all the traditional rules: you can only remove this money penalty free after the age of 59½, and you must start your own RMDs after 70½. You’ll also have to name your own beneficiary.
  2. Transfer the Assets into an Inherited IRA in Your Name. Because RMDs have already started, you must continue taking them. The RMDs will be taken based on your life, using the single life expectancy table from the IRS. They’re taxed at your ordinary tax rate. There’s no 10% penalty for early withdrawal. However, if you have an inherited IRA, you can’t designate a primary beneficiary—you must name a successor beneficiary, because if the successor beneficiary inherits the IRA, he’ll have to continue taking RMDs based on your This typically results in RMDs being very high and leaves the successor with a large tax bill.
  3. Take a Lump-Sum Distribution. When you take all the money at once, you avoid the 10% penalty, if you’re under 59½. However, you must pay tax on that large distribution. Of the three choices, you’ll typically want to combine the first two options above, especially if you’re under the age of 59½.
  4. Open an Inherited IRA and Close Account Within Five Years. This lets the account continue to grow for five years. Then you can close it and withdraw all the money. You will pay tax on the amount of the withdrawal, but there’s no 10% penalty for early withdrawal.

The options for an inherited Roth IRA are not much different for a spouse. You still have the option of rolling the Roth IRA into your own IRA. This is perhaps one of the best options with Roth IRAs. You can also open an inherited IRA, but you’ll need to distribute the money from the account. You must start RMDs on the later of the date when the decedent would have turned 70½ or by December 31st of the year following the year of death. If you opt not to start RMDs or you forget, you’ll have to close the account within five years. The IRS usually doesn’t require RMDs from a Roth IRA. The final option is to just take all the money from the account, which lets you to take the money out tax and penalty free.

Non-Spousal Beneficiaries. If you’re a non-spouse beneficiary, you have more limited options. If the decedent began taking RMDs, you have a few options. First, you can continue taking RMDs. Because the RMDs have already started, you must continue taking them. Next, you could take a lump-sum distribution and withdraw all the money at once. You’ll avoid the 10% penalty if you are under 59½. However, you’ll still have to pay tax on the distribution.

If the decedent was over 70½ and was required to take RMDs, you have the same options as if they were under 70½, plus one additional option of moving the IRA to an inherited IRA and closing it with five years. You don’t have to take the money out in one lump sum but can spread it out over five years. At the end of the five years, the account must be closed. If you have a Roth IRA, you have all the same options as a traditional IRA for a non-spouse beneficiary.

There are a few reminders to note. First, distributions from a traditional IRA do count as income—these distributions can jump you into a higher tax bracket, which is a factor to consider. If the decedent died without taking an RMD, assuming she was 70½, you first need to remove the RMD. If you forget or delay too long, it can cause you to be subject to an expensive penalty.

Reference: Investopedia (November 22, 2018) “What to Do With Your Inherited IRA”

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Learning from Scams That Target Older Americans

If it feels as if you are under attack by con artists every time you turn around, you might be correct. Fraudsters steal tens of billions of dollars a year from seniors and programs like Medicare and Medicaid. Studying the schemes crooks use can help you discover ways to protect yourself from becoming a victim. Let’s start learning from scams that target older Americans.

Why Scammers Target Older Americans

There are four reasons why fraudsters target older Americans:

  • Many seniors have built up value in their retirement accounts and house equity.
  • Con artists can prey upon the predictable health issues many older Americans experience.
  • Seniors are often too embarrassed to report it to family or law enforcement, when someone rips them off.
  • Older Americans grew up in a different time, when many people did not have to lock their doors, much less be on guard for people trying to steal their identity.

The Scope of Healthcare Fraud

Experts estimate that scammers steal at least $60 billion a year from Medicare. While that fraud does not take money directly out of the pockets of seniors, it puts money that should pay for older Americans’ medical bills into the pockets of crooks. That is $60 billion a year that is not available to pay for hospital and doctor bills, prescription drugs, chemotherapy, diabetes care and other help that seniors need.

Foreclosure Avoidance Scams

When an older person falls behind in mortgage payments, he faces the real possibility of losing his home to foreclosure. A foreclosure prevention program will sound like a godsend, so he can keep his home. The problem is that con artists set up companies that claim to use government funding to help the senior, who is vulnerable and afraid.

One such scammer stole over $10 million from older Americans and did not help them avoid foreclosure. The fraudster had people send him cash under the guise of “trial payments” and “reinstatement fees.” Instead of using the funds to prevent the foreclosure of the senior’s house, the crook kept the money.

Lesson learned: Contact your mortgage company about how you can get back on track and prevent foreclosure. Ask if they have programs for seniors. Contact your local agency on aging and housing authority for guidance on programs that could help you. Check with the Better Business Bureau and law enforcement, before sending money to a company that claims to help people in crisis.

Prepaid Funeral Scams

The pre-paid funeral plan industry has generated infamous scandals, by bilking seniors out of thousands of dollars with the promise of delivering the funeral of the senior’s choosing. Many older Americans fell victim to this scheme, because they did not want their surviving loved ones to have to bear their funeral and burial expenses.

The fraud happens when the senior pays for a future funeral, but when they pass on, the funds paid years before have disappeared. One such scam stole nearly half a billion dollars from almost 100,000 older adults.

Lesson learned: Rather than trusting some stranger with thousands of your hard-earned dollars on the promise of goods and services years down the road, open a savings account earmarked for your funeral and burial. Leave instructions with your closest loved ones and write a letter with the details of what you want to be done, when the time comes. To allow for immediate access to the funds, name the person who will make your arrangements as a joint owner of the account.

The number and types of scams that target older adults are limitless. You should talk with an elder law attorney in your area about how to avoid fraudulent schemes, and about how your state’s law may be different from the general law of this article.

References:

AARP. “Meet the Faces of Fraud.” (accessed December 20, 2018) https://www.aarp.org/money/scams-fraud/info-2017/elder-fraud-scam-stories.html

Suggested Key Terms: scams that target older adults, how to avoid being a scam victim, tips for seniors on avoiding fraud

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