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You just inherited a $300,000 Roth IRA from a recently deceased relative. If you handle it correctly, you can parlay this into a very pleasant addition to your retirement income. Since the Roth IRA income is tax-free, you can cash it in right now, and you'll get all $300,000. Very nice. You could also leave it alone for 21 years, and your $300,000 would grow to $756,072. Also nice. There is, however, an even better way to make the IRA inheritance work for you.

Leave the money in the original Roth IRA and withdraw a specific amount each year. The withdrawal itself is tax-free, and the money that remains after the withdrawal continues to grow tax-free. As a 65 year old, you will have 21 years to empty the inherited IRA account as it grows.

The specific amount to withdraw annually is the "Required Minimum Distribution" amount- and you absolutely need to withdraw this amount every year. When you do, you are allowed to "stretch" your inherited IRA. This strategy can turn a modest IRA inheritance into a much bigger retirement income. If we take the $300,000.00 inheritance example as the basis, by annually withdrawing the minimum required over 21 years and leaving the rest will result in $875,135.

There are some variables and details you need to pay attention to, so it would be wise to acquire the services of a knowledgable advisor. Making mistakes can really mess things up. For example, if you do not fill out the beneficiary form for an IRA, the contract with the IRA custodian may state that the default beneficiary is your estate. If you have no beneficary, your account must be liquidated- and taxes paid- in five years. Your beneficiary gets no stretch-out, and no more tax-favored growth.

Don't cash out the account before talking to a estate planning or tax advisor. Doing this tends to push you into a higher tax bracket, and you lose a lucrative opportunity for your impatience. Make sure your advisor knows all the details of your IRA, this is an estate planning document.

Need help with estate planning or tax law? Use the phone number or inquiry form on this page. We will get back to you within 24 business hours. 

 

- The Estate Planning Team
  Rogers Sheffield & Campbell, LLP

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