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January 17, 2021

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When you inherit qualified money

Here are some of the options available to you

By Kathi Dunlap at Faith Investment Services
If someone dear to you passes away, you may inherit some money from them.  

What to do with the money (accounts held at a bank, brokerage, or other means) often depends on two things – whether the accounts are tax-qualified or not AND what your relationship is to the deceased. 

Let me break that down:

Any money that has never had tax paid on it (often called pre-tax money) is considered a qualified account by the IRS.  This is the case for Traditional IRAs, 401ks, 403bs, and other tax-qualified accounts.  These kinds of accounts require very careful handling or you could be hit with a large, unexpected tax bill.  You should talk to a financial adviser before receiving any funds through inheritance – especially tax-qualified funds.

If you are the surviving spouse, you can transfer the tax-qualified funds you inherit into your own IRA and preserve their tax-deferred status.  Again, this should be done carefully with a financial professional.

If you receive qualified money through inheritance and you are NOT the spouse of the deceased, you may want to do a direct transfer of the funds into your own IRA – a special IRA called a “beneficiary” IRA or “inherited” IRA. 

These IRAs have special rules placed upon them which have changed recently.  It used to be that you were required to take RMDs (required minimum distributions) over your lifetime from these inherited funds. 

Now, however, as a result of the recently passed SECURE ACT, you only have 10 years to fully withdraw the money from the beneficiary IRA.  Because all of this money is taxable in the year(s) in which it is withdrawn, it is wise to use careful planning about when and how much to withdraw each year. 

There is no cookie-cutter answer to this – it really depends on your situation each year and your overall earning trajectory.

Our loved ones often leave money to us, hoping that it will provide needed income or stability or blessing.  They can make the best plans possible but, if we don’t know the rules governing inherited money, the money may not accomplish what they had hoped.  It’s pretty important to be informed and to rely on trusted advisers to help you. 

This whole situation is compounded by the fact that we are often grieving and overwhelmed when this inheritance situation happens. People sometimes feel rushed or pressured to make a decision or to take the sole advice of the current adviser.  It is completely ok to hit the pause button and get a second opinion – in fact, it is very wise.

Another option is to plan ahead if/when you know that you are likely to inherit funds from a parent, aunt or uncle, or even spouse. 

It is not self-seeking to get an education ahead of time. If they worked hard to accumulate the money, it is quite likely that they’d be honored that you are learning how to preserve and protect it for your future use.

Contact us if you’d like to have a no obligation conversation about your options for inheriting money.  Faith Investment Services 419-358-4207  or www.myfaithinvestments.com/contact

**The information within should not be considered as tax or legal advice. Neither Faith Investment Services, LLC nor the CFD companies offer legal or tax advice.  Advisory Services are offered through Creative Financial Designs, Inc., a Registered Investment Adviser, and Securities are offered through cfd Investments, Inc., a Registered Broker/Dealer, Member FINRA & SIPC, 2704 S. Goyer Rd., Kokomo, IN 46902. 765-453-9600. Faith Investment Services is independently owned and not controlled by the CFD Companies.  Neither Faith Investment Services, LLC nor the CFD companies offer legal or tax advice.