Estate Planning and Inherited IRA Issues In Oklahoma

There are several concerns regarding estate planning and inherited IRA accounts in Oklahoma. An Individual Retirement Account or IRA is an investment account that holds retirement savings with certain tax advantages. This is as long as the money you deposit in a qualifying IRA is held until retirement age. Then, the account holder doesn’t pay any taxes, whether income or capital gains, on the money in the IRA. When the holder of the IRA dies, the account will typically pass to someone named in the original account owner’s will or trust. This is called an inherited IRA. Propper estate planning and inherited IRA account issues better serve if the creator and the beneficiary understand the implications for their retirement account.

Two Main Types Of IRA

The two types of IRA people often know are traditional and Roth. Both accounts are tools can be in Estate Planning to avoid probate. A traditional IRA owner contributes pre-tax earnings. You can consider these contributions as tax-deductible. When the account holder retires and begins to receive distributions from the IRA, the money you remove from the account is then taxed as income.

A Roth IRA holder contributes income that has been taxed, and the contributions to the account are not tax deductible. Upon retirement, withdrawals from a Roth IRA are tax-free. The differences between a traditional and a Roth IRA are important to the person who receives an IRA from a person who has died.

Spouses Who Inherit

The IRS allows three options for a spouse who inherits an IRA. One option is to rename the IRA with the surviving spouse as the account owner. This is a retitling, and it allows the spouse to keep the IRA as it was and draw from it as allowed by law. One provision of the law is that the account owner must be 59 ½ years old to withdraw from the IRA without paying a penalty.

The next option is to roll over the funds in the inherited account. This should be into a tax-free IRA or employer retirement plan that the surviving spouse already owns in their name. The third option is to act as the beneficiary of the deceased spouse’s IRA rather than its owner. This allows the withdrawal of the account funds in a lump sum. Alternatively, you can transfer its assets into an “inherited IRA” held in the name of the surviving spouse.

The choice of which option the surviving spouse makes with the IRA of the deceased spouse will determine the allowance of the withdrawals. In the first two options, the spouse will need to pay a 10% penalty for early withdrawals–before 59 ½, while the third option requires that the inherited IRA owner begin withdrawing from the account at age 72. A recent law called the SECURE Act raised the age of RMDs from 70 ½ to 73, as the law now stands.

A spouse who inherits a Roth IRA can withdraw any or all funds in the account with no taxes on the withdrawals as long as the account has existed for five years or more. The spouse will not have a 10% penalty charge for early withdrawal if this is the case. 

Inherited IRA Beneficiaries

Someone who inherits an IRA from a parent or other non-spouse is the beneficiary. These new owners do not have the option to retitle the IRA in their name or roll over the funds into an existing IRA as spouses can do. Still, they can transfer the funds into a new account, which becomes their “inherited IRA.”

A new holder could withdraw the funds and cash out a traditional or Roth IRA in a lump-sum distribution, but there are some consequences. Funds from a traditional IRA are taxable income upon withdrawal. The withdrawal is tax-free for Roth IRAs that have existed for at least five years. With the passage of the SECURE Act in 2019, non-spouse beneficiaries must take the funds out of the account. This has to happen within ten years of the original account owner’s death.

More Articles Related to Estate Planning From Our Tulsa Lawyers Blog

Legal Guidance With An Inherited IRA

Handling an inherited IRA to get the most value from it can be perplexing. Experienced estate attorneys at Kania Law Office will guide you through the process. Call us at 918-743-2233 or contact us online to schedule an initial consultation.