Here’s some financial advice for young couples, for mid-career professionals, and for those who may be nearing retirement: If you receive an inheritance, make a plan for it!
Whether you inherited a retirement account, property, or a certain amount of money, making a plan for how to use the gift will help you make the most of it. For example, what are the tax implications? If you sell an asset or are left with funds, do you invest it, put it toward a specific financial goal, or spend it? What you should do if you inherited a retirement account can be especially confusing, as there are rules and regulations you may not be aware of on your own. Talk with a financial advisor to see what makes the most sense for your situation.
Inheriting an IRA or Qualified Retirement Plan
If you’ve inherited a retirement account, you have 4 main options:
- If it’s your spouse’s retirement account that you inherited, you can transfer the money from your spouse’s account to your own account. Distribution rules are the same as if the account had always been yours.
- You can transfer the money to an inherited IRA. Tax rules around these accounts can be especially complicated, but you can generally start withdrawing money from the account immediately without having to pay a penalty. You will be required to make Required Minimum Distributions (RMDs), which have specific rules as well. Talk to a financial advisor so you understand what this option looks like for you.
- Of course, you can cash the money out once you receive your inheritance. This money could count as taxable income, depending on the type of account you inherited.
- You can choose to “disclaim” the account, choosing not to take the money and instead pass it on to other beneficiaries. This could be a wise decision if the money would put you in a higher tax bracket, create a large tax bill, or is simply money you don’t need.
Before making a decision, there are a few important things to consider.
What to Consider Before Making a Decision about an Inherited Retirement Account
When it comes to an inheritance, there’s not one option that works best for everyone. Before making a decision, consider the following:
- What is your relationship to the account holder? Your relationship will determine how you can use the funds.
- What type of account did you inherit? The type of account will determine how money is treated when withdrawn.
- What age was the original account holder? Most retirement accounts require you to begin taking RMDs each year once you reach a certain age. For inherited accounts, it’s the original account holder’s age, not yours. If you don’t take RMDs when required, you can face hefty penalties.
- What is your age, financial goals, and retirement time horizon?
Financial Planning for Young Couples
Retirement planning has changed. Retirement income will look different for Millennials than it does for Baby Boomers. There are different elements to consider, and therefore, what to do with an inherited retirement account may be different for young couples.
When it comes to inheriting a retirement account, here’s some financial advice for young couples:
Putting it Toward Your Own Retirement
If you’re still years, or even decades, from retirement when you receive your inheritance, you may want to invest the money for your own retirement, allowing the money to compound and grow tax-deferred.
Choosing Not to Take the Money
If you have young children, investing the money for their futures, as opposed to yours, can give the funds even more time to grow.
Taking the Money Now
While cashing out a retirement plan is not typically a financial advisor’s top recommendation, as using the money eliminates the opportunity for it to grow, there are instances where this may make the most sense.
For example, what if you inherited your spouse’s retirement account? With a second income gone (or if you were a one-income family and that is now gone), you may be worried about how to make ends meet on your own. Taking the money now to pay off debt, a mortgage, or the day-to-day bills may be a better option. Discuss your situation with a financial advisor first, because taking the money out is a decision you won’t be able to undo.
Transferring the Money to an Inherited IRA
If you won’t need all the money in an inherited account right away, you may want to transfer the money into an inherited account where you can both take money out as needed and leave some in the account to grow. Again, discuss your situation with a financial advisor who can help you understand the impact of your decision.
Whatever You Do, Make a Plan!
Receiving an inheritance can truly be a gift. However, inheriting a retirement plan can be a new financial responsibility. What you don’t want to do is make an emotional decision that can’t be undone.
Take time to mourn the loss of your loved one. When you’re ready to discuss your inheritance, talk with a financial advisor about your options. A financial advisor can provide objective, outside, educated advice you may not be able to see on your own, especially during tough times.
At Scarborough Capital Management, our team of financial advisors has been helping busy families make smart financial decisions for more than 35 years, whether that’s with your own retirement planning, an inherited retirement plan, or wealth management for the next generation.
Schedule a no-obligation conversation with our team to see how we can help. Having a financial advisor in your corner before a loss happens can help you get through unsettling times with a little less stress. Trying to find a financial advisor you trust during times of loss can be dangerous. Take the time now and lean on your advisor in times of uncertainty.
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