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Inherit an IRA: Don’t Make This Big Money Mistake

Save your kids thousands in taxes when they inherit your Individual Retirement Account (IRA).
When people die, the heirs typically close out the bank accounts, the stock and bond accounts, and move them into their own accounts.

This SHOULD NOT BE DONE with Individual Retirement Accounts (IRAs), the IRAs you opened years ago, or the IRA into which you rolled a 401 (k) when you left a job. Your spouse can inherit these accounts with no problems.

Not so with your kids, or any other non-spousal beneficiaries.  If they roll the money into their own accounts, the total sum immediately becomes taxable. Instead, the children should leave the accounts at the financial institutions where you held them, and simply re-titile them to avoid a big tax bite. This will enable the children to avoid paying taxes on the money, and will give them the option of spreading the use of the money over decades, for themselves, and their own children and grandchildren.


Here’s how it works.  Sam Smith leaves his IRA to his daughter, Angelina. She re-titles the account as “Sam Smith, (deceased Sept. 1, 2011), for the benefit of Angelina Smith, beneficiary.”  Also include Angelina’s Social Security number. Angelina is required to make a minimum withdrawal each year, based on her age. The rest of the money keeps growing. Remember, if she had simply transferred the money to her personal IRA when Sam died, the entire account would have become taxable.


If Angelina has a sister, Diane, who is sharing the inheritance, they divide it, and each of the, re-titles her share. If the funds were held by a mutual fund firm, and Sam had listed his daughters as beneficiaries, each getting 50%, they would contact the firm, asking that separate RE-TITLED accounts be created for each of them.

Angelina and Diane, if they have children, can pass on their money in the same way. And the funds contributed by Sam can last for generations, for his children, and grandchildren, and their offspring.

The same rules for avoiding a tax trap apply to inheriting a 401(k) account. Re-title it. DON’T Move it into your own account.

If you have IRA or 401(k) money and you want your children to inherit with the least taxes, tell them about this. And make sure your lawyer, or whoever else will handle your estates, knows about this rule, too.


Written by Bob Rosenblatt

Bob Rosenblatt is a researcher, writer and journalist who helps people looking for up-to-date answers and information on the perplexing issues at the intersection of finances and aging. Bob publishes a weekly report — please take a moment to subscribe in the upper right hand corner of this page.

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