Many people are under a false impression that they do not need to make withdrawals from an IRA they have inherited until they would have to take withdrawals from an IRA they initiated. To avoid penalties it is important to understand the rules.
If you have an IRA of your own or you inherit one from your spouse, then you are not required to withdraw any money from it until you reach the age of 70 ½ . However, that is not the case if you inherit an IRA from anyone other than your spouse. Inheriting from someone else requires you to make withdrawals sooner or pay stiff penalties.
Recently, the News & Observer discussed the withdrawal rules in "Money Matters: Sibling seeks advice after inheriting brother's IRA."
Here are the basic rules:
1. You must begin to take required minimum distributions the year after the IRA creator's death. This amount varies depending on the beneficiary's age. You can take more than the minimum amount, but everything withdrawn counts as income for income tax purposes. If you do not take the minimum amount, you will be assessed a 50% penalty and the amount you should have taken out will still count as income for tax purposes.
2. There is an exception to the above if the IRA creator passed away before the age of 70 ½. You do not have to take a required minimum distribution as long as you take all the money out of the IRA within five years.
3. If you make a mistake and do not take a distribution when you are required to do so, you can fix the error and apply to the IRS for a waiver of the penalties. As this can be complicated you should seek the advice of a Cincinnati professional.
Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.
For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).
Reference: News & Observer (Feb. 27, 2016) "Money Matters: Sibling seeks advice after inheriting brother's IRA."