An Inherited IRA Has Important Tax and Estate Planning Implications

Different Rules and Options Apply to Spouses and Non-spouses

WASHINGTON — A popular retirement savings vehicle for generations of investors, Individual Retirement Accounts (IRAs) provide tax-advantaged ways for individuals to fund their retirement. Many Americans have opened their own IRAs, but virtually every day, some of us get an IRA through an inheritance.

An Investor Alert issued today by the Financial Industry Regulatory Authority (FINRA) urges brokerage account holders, family members and other IRA beneficiaries 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 of inheriting an IRA.

“An aging American population has meant a new generation of IRA investors is emerging—one that has inherited, or will inherit, an IRA from a parent, spouse or other person,” said Gerri Walsh, FINRA’s Senior Vice President of Investor Education. “An inherited IRA can be challenging for new investors, especially when it comes to understanding various distribution scenarios. It’s important for investors to know that different rules and options apply to spouses and non-spouses.”

Usually, when an individual opens an IRA account, a beneficiary is named. When the owner of an IRA dies, brokerage firms generally have systems in place for beneficiaries to follow—a process that usually starts by filling out a beneficiary claim form.

“An individual who is listed as the IRA beneficiary may have questions about when and how they can withdraw money from the account—and when they must take a Required Minimum Distribution (RMD),” Walsh said. “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.”

FINRA’s alert provides an overview of these key factors and walks investors through inheritance scenarios for spouses and non-spouses. It also links investors to detailed information on RMDs and the consequences of withdrawing funds from an IRA.

To help the ownership transition process go smoothly, FINRA provides the following tips for heirs and beneficiaries:

• 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.

• 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.

• 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, be sure to check the background of the investment professional using FINRA BrokerCheck.

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FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.