We all dream of having a ‘long lost aunty’ or relative that was exceedingly wealthy and has no other living relative except you. Low and behold, you get a knock at the door and two men in a limousine come into your home and explain your new found wealth.
For many of us, that is simply not a reality and not going to happen. If you receive an IRA from someone that is not your immediate spouse, there are several key things to know & steps to take to start taking advantage of the kindness shown of a lost loved one.
Firstly, you need to get the title relisted from the deceased person to yourself. This will involve lawyers and representatives of the estate – again more lawyers. it is key that your funds are put into a separate banking account and that it is clearly named as such. In addition, while you may have more than one IRA given to you, these need to be kept separate as they may have different conditions attached.
While we all would love the process to be simple so you can pay off your house, or buy a new car, there are only three options when you are given an IRA, Cash out, Disclaim or stretch.
You see the total figure, you love the look of it and jump in without looking. Ah, hang on…all that money is now added to your income and taxed by Uncle Sam. That means you could be pushed into a higher tax bracket and lose more of your salary. So think about it wisely, although this is a simple option, it is not always the best.
Why in the world would someone do this? Turn down money? Well, there are people that may do this for one or more reasons. For example, depending on how much they earn or how much money they have in their bank – they may not need the money, in which case it would be redistributed to other family members from the deceased persons will, giving them something. Potentially there may be creditors that would be wanting to get their hands on all and any money the beneficiary has, so by disclaiming it, it is not required to be declared and they can go on as they were.
Stretching the IRA.
The most sensible option, giving you an annual payment for your ‘expected lifetime’ as per the IRS publication 590, which allows you to keep the tax rate lower and have the guaranteed income. As you get older and your income decreases as you may want to cut back the hours you work, you can increase the IRA amount you receive, until you retire and just enjoy whatever you receive as living money to reduce the tax burden as much as possible.