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Three Tips for Managing an Inherited IRA

  |  By Deanna Fong

IRAs have become a popular retirement savings tool since they were introduced more than 40 years, and it’s inevitable that, as FINRA says, a new generation of IRA investors is emerging: One that has inherited or will inherit an IRA from a parent, spouse or someone else.

When an investor opens an IRA, a beneficiary—such as a child or a spouse—is named with the intention that when the owner of an IRA dies, that beneficiary will inherit the IRA. Given the increase in the number of inherited IRAs, FINRA recently issued an alert, noting that an inherited IRA can present challenges for new investors.

If you find yourself in the position of inheriting an IRA, FINRA provides valuable information, including key factors on distributions, multiple beneficiaries and the following tips to heirs and beneficiaries to help the ownership transition process go smoothly:

1. Notify the brokerage firm in a timely manner of an account holder’s death and be sure to provide all required documents. Contact the brokerage firm if you have questions about what documents they will need and how to obtain them.

2. If you are the spouse who elects to treat an IRA as your own, know what you own. Take the time to understand your investment holdings, including the risks of each investment, associated fees and restrictions on when you can sell the investment. FINRA offers information about investment products and key investment concepts.

3. As a spouse, you can assess whether the current brokerage firm and broker are right for you. You may choose to stay with the deceased’s brokerage firm and broker or transfer the account to another firm and broker. When deciding, FINRA reminds investors to check the background of the investment professional using FINRA BrokerCheck.

In its detailed alert, FINRA also outlines how people with an inherited IRA can withdraw money from the account and when they must take a distribution (i.e. required minimum distributions or “RMDs”). IRS rules regarding distributions are influenced by a number of factors, including age, account type, and the relationship of the account holder to the beneficiary. Distributions may also be more complicated if you inherit a self-directed IRA that holds alternative assets. To learn more about taking distributions from a self-directed IRA that holds illiquid alternative assets, you can read the following blogs. (Please note: While these blogs discuss required minimum distributions—RMDs—these situations may not be relevant to your inherited IRA.):

FINRA urges investors who inherit an IRA to seek information from the IRS or consider consulting with a tax specialist due to the complexity of the income tax and estate planning implications. At PENSCO, if you have questions about an inherited IRA, you can reach us at 800.962.4238.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.