Tax consequences of liquidating ira
When someone leaves you an individual retirement account, or IRA, you can find yourself at the tricky three-way intersection of estate planning, financial planning and tax planning.One wrong decision with the inherited account can lead to expensive consequences, and good luck trying to persuade the IRS to give you a do-over.One slip-up by the beneficiary, or even by the benefactor before death, and that tax gem can be lost forever.
Nonspouse beneficiaries have two options for liquidating the account: The stretch IRA is the tax equivalent of the treasure at the end of the rainbow.
Attorney Natalie Choate advises IRA beneficiaries to do nothing until they’ve met with a financial adviser who can explain their options.
“The worst thing to do would be to cash out the plan, put it in your account, and then go see an adviser and say, ‘Now what? Before that happens, learn these eight must-know secrets for handling an inherited IRA.
“You ask who their beneficiary is, and they think they know.
But the form hasn’t been completed, or it’s not on record with the custodian. If there is no designated beneficiary form and the account goes to the estate, the beneficiary will be stuck with the five-year rule. Just a few pieces of information can direct large sums of money.