Inherited IRAs?

Common Mistakes with inherited IRAs: There is alot more to it but here is some basics.

1) Not naming beneficiaries. If the IRA owner in question (the one whose IRA is being inherited) has already died, then it's clearly too late for that person to name beneficiaries - this mistake is out of your control and not really your mistake. Without named beneficiaries, much or most of the potential long-term tax deferral benefit, and other benefits, of inherited IRAs are simply not available. 

2) Titling errors. It is very easy to make what seems like an entirely innocuous and repairable mistake in titling the IRA you inherit that results in the whole thing being deemed by the IRS as having been distributed, and therefore, taxable. Do not automatically assume that the financial institution holding the IRA you are inheriting knows what to do; there are many instances of mishaps and the IRS will be totally unsympathetic . 

3) Non-spouse beneficiary attempting a roll-over. A lot of people figure, well, the inherited IRA is just an IRA, and I already have my own IRA, so I'll just roll over the inherited one into my existing IRA so I don't have to mess with two accounts.    To be completely clear: you may be able to move your inherited IRA to XYZ, you just can't do it by roll over. Instead, use what is called a trustee-to-trustee transfer.

4) Unnecessarily rapid draw-down of the inherited IRA. Often those who have inherited an IRA are told (yes, sometimes by big-name financial institutions) they have 5 years to distribute the assets in the account. That is true in certain cases, but in many cases, it is not, using the 5 year period then may be a disaster. 

5) Failure to make required minimum distributions. Sometimes a person inheriting an IRA forgets, or does not realize that minimum distributions have to be made.  Do not forget about the RMD's.

6) Failure to account for non-deductible IRA contributions made to the original IRA. There is no income tax due on the portion of an IRA distribution that represents non-deductible (i.e., after-tax) IRA contributions. And if the IRA is a Roth, necessarily it contains non-deductible contributions  the only kind that can go into a Roth.

7) Using the wrong table to compute minimum distributions. The table for computing minimum IRA distributions for a regular (non-inherited) IRA is ordinarily the Uniform Lifetime Table (exception: your spouse is more than 10 years younger and is the sole primary beneficiary of your IRA). But for IRA beneficiaries, it's ordinarily the Single Life Expectancy Table.

8) Failure to name a beneficiary for the inherited IRA. The first thing you should do when you inherit an IRA is to name your own beneficiaries.

9) Failure to take the IRD deduction when inheriting from an estate that paid estate tax. Sounds confusing, but don't skip over this  it could be worth a lot. 

10) Failure to earn a decent return on your inherited IRA. I had said most mistakes, this is a freebie "bonus" mistake. Many people in moving over the  Inherited money, most often get wrapped up in the moving process and not the earning or return process. Do not overlook this section, speak with a professional.  

If you are considering Retirement Planning, call for a free consultation today.