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Non-Spousal IRA Inheritance with an IRA Rollover

Today's rules allow you to defer taxes by rolling over the distribution into an IRA that you control. But you must follow the proper procedure to get this taxpayer-friendly outcome.

Unlike in prior years, non-spousal beneficiaries can now defer income taxes from the inheritances they receive. The trick is to get it done right!

You can’t teach an old dog new tricks, but you can teach an inherited non-spousal IRA to “rollover” correctly. In fact, if you do not handle this basic financial transaction with care, then it will cost you.

As with most tax moves, there is a wrong way and a right way.

First, the wrong way. In former times you had no choice as a “non-spousal” inheritor of an IRA. You had to take the entire account balance as a “lump-sum” and take the tax hit. Similarly today, the result is the same if the money reaches you before it reaches an IRA trustee.

Now, for the right way, as described in a recent article in SmartMoney titled Rolling Over Uncle Henry's 401(k). Essentially, you can let your inherited IRA spill over into a newly created IRA you establish to receive regular distributions from the inherited IRA. Note: the retirement funds you inherit cannot be accumulated tax-deferred in the newly created IRA, as under certain rules that apply to spousal IRA rollovers. In fact, you are required to make minimum withdrawals or face a 50% excise tax on the difference between what you should have withdrawn and what you actually did withdraw.

Another article in Forbes, titled IRA Rollovers – Let's Be Careful Out There, offers more assistance on the rollover process and reviews some recent court cases to illustrate the finer points of an entirely trustee-to-trustee rollover. Never let an IRA trustee of an inherited IRA write a check directly to you! Instead, instruct the trustee to talk to the new trustee of your newly created non-spousal beneficiary IRA to coordinate the transfer.

Reference: SmartMoney (August 9, 2012) “Rolling Over Uncle Henry's 401(k)”               

                 Forbes (August 2, 2012) “IRA Rollovers – Let's Be Careful Out There

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