My grandmother has squirreled away retirement accounts that are still being found. Leading to this situation.
I am inheriting a 40k Merrill Lynch IRA with a financial advisor and everything.
The plan was to roll it into my own account and figure out what to do with it later, but my mother who has dealt with a lot of death and inheritance lately said the financial advisor doesn’t know what he’s talking about. Apparently there’s an inherited IRA that has to be disbursed by 10 years or I can’t touch it until retirement? My mom said when I get the documents I need to make an appointment with her financial planner, which I will, but I’m lost.
I’m in over my head, I have a 401K, a fractional auto stock account, and emergency savings. I’m applying for medical school in the spring, have a 1.5 year old and a husband, and we don’t make a lot as first responders.
Our debt is our new car loan at 0% interest, my credit cards that have been taken away from me for my own good, and my student loans for paramedic school.
Please point me to resources for the financially illiterate or explain this to me like I’m stupid?
I inherited an IRA and I’m lost.
byu/Cole-Rex inpersonalfinance
Posted by Cole-Rex
11 Comments
Inherited IRAs have to be withdrawn within 10 years. They cannot be rolled over into your own retirement account. You have to pay taxes when you withdraw the money, which is a good reason to spread out the distributions.
What is the interest rate on your student loans?
You cannot roll funds from Grandma to IRAs in your name.
It *must* go to specifically labeled *Inherited IRAs*.
Inherited IRAs have specific rules regarding distribution you should be aware of. The 10 year rule is real.
* https://www.fidelity.com/learning-center/personal-finance/retirement/non-spouse-IRA
You don’t need a financial advisor and they are likely to cost you more than you should pay. Just follow the investing advice in this sub and start running through the wiki. Most important, establish a budget, understand your income and expenses, don’t blow through the 40K all at once.
Yes, there is, unless you are legally disabled, in which case you do not have to withdraw within 10 years.
I’m in the same boat-please note when we say withdraw that means you need to take it out of an inherited Ira. That amount you withdraw becomes part of your taxable income for the year. After you pay taxes, the money is yours to do what you want with but you don’t ever have to touch it-it can be reinvested right away.
I too am a spender so with mine, I meet with my advisor at the end of the year, we review my income ytd and decide how much I can take, then they withdraw that, they pay the taxes, and reinvest the remainder. So I don’t ever see it/don’t have to worry about it.
Have the IRA converted to an inherited IRA.
You will (maybe) need to withdraw RMD, but otherwise you will just need it emptied by December 31st..10 years after she died.
Each withdrawal is taxed as your income, so withhold accordingly.
The account must be moved into an Inherited IRA account, you can’t combine with your IRAs. If grandmother was taking RMDs, you must continue to make annual withdraws, their are extreme penalties if you miss and RMD. You need to be sure on whether the account was an IRA or Roth IRA. An IRA, 401k, 403b, 457 . . . account is taxable income when you take money out. If you’re still a student, you might want to plan on cashing out before you graduate and start working to pay minimum taxes. If the account was a Roth version, there’s no tax due, but check distribution requirements.
The good info has already been given here. I would add: TANSTAAFL. No financial advisor works for “free.” They just might not explain how exactly they get compensated for managing your affairs.
Your mom is right. The Merrill advisor got that wrong. You can’t roll an inherited IRA into your own account. That mistake can trigger a massive tax bill if you go through with it.
Quick breakdown: as a non-spouse beneficiary you have 10 years to pull the full balance out. You don’t have to take it all at once. Every dollar you withdraw gets added to your taxable income that year so timing is everything, especially given your situation.
$40k over 10 years is actually very manageable if you plan it right. Med school means there will be years your income is lower. Those are the years you want to pull more out.
Your mom’s instinct is spot on. Get in front of a financial advisor who will sit down with you, look at your whole picture and actually map it out. Income, debt, goals, all of it. The right person makes this way less overwhelming than it feels right now..
I am currently going through the same thing. Check with the financial planner since this can be complicated but here is what we have learned:
We had the option of taking a lump sum from the IRA. The downside is that this may move your income for the year into a higher tax bracket. IRA money was invested before taxes so you (the beneficiary) has to pay taxes on it when you take it out.
We also had the option of turning her IRA into inherited IRAs for the beneficiaries. You must take yearly minimum required distributions and empty the account in 10 years. You can empty it or take whatever money you want out before the 10 years is up.
Once an inherited IRA is set up with the institution that your grandmother used it can then be moved to another institution if that is more convenient for you. You can’t do this yourself, there are loads of rules and penalties if you get it wrong. Let the people at the institutions handle this.
The whole topic is complicated and there are all sorts of exceptions but this is how it worked for me. All the beneficiaries decided to get an inherited IRA since that seemed to offer the most flexibility and possibly keep the taxes more manageable.
Your mom is correct. It can still be moved but needs to be separately accounted.