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How to make an inherited Roth IRA part of your estate planning

On Behalf of | Aug 13, 2020 | Estate Planning

Many people know how helpful it is to have an Individual Retirement Account, or an IRA. A Roth IRA in particular is ideal, as it may not be subject to tax when the owner makes a withdrawal. However, for those who inherit a Roth IRA, the rules are a bit different.

If you have inherited a Roth IRA or think that you may end up bequeathing one to someone else as part of estate planning here in Maryland, there are certain details you need to know. Some actions with a Roth IRA may incur more tax than others, so it is important that you know what to do with an inherited Roth IRA, so that you or your beneficiaries can maximize its potential.

Take quick action with an inherited IRA

There are certain actions you’ll want to take immediately when you inherit an IRA. The first is moving it into an inherited IRA account. Take care to move the old account into a new one that is the same type — that is, move a Traditional IRA into a Traditional, or a Roth into a Roth. If your spouse is the one who left you the IRA, you can either move the money into your own existing IRA or open one of your own.

Next, you’ll want to determine whether you qualify for an exemption when it is time to distribute the funds of an IRA. Recent tax laws say that certain beneficiaries of an inherited IRA must take the funds out within 10 years of the owner’s passing. However, if the beneficiary is the owner’s spouse, is a minor, has a disability or is less than 10 years younger than the IRA owner, he or she qualifies for an exemption, giving more time to empty the account.

Determine your financial goals

Once the money is in the proper account and any known exemptions applied, you can determine what to do with the money. Some may choose to increase their own retirement savings with an inherited Roth IRA, especially if they do not immediately need the money. Others may use it to cover living expenses in order to contribute more of their own income to retirement. Still, others decide that the money can go toward another financial goal, such as paying off debt.

In any case, it’s a good idea to consult a financial advisor to determine which option is right for you. An attorney is also a great source of knowledge, particularly one with experience in estate planning. Having professional legal assistance in managing all aspects of your estate plan can help set both you and your loved ones up for a bright future.