IRAs and other types of retirement accounts are perceived by many people as pretty simple plans. But, as we have discussed in the past, there are many complexities to IRAs that can cause big problems. And when it comes to inheriting an IRA, the rules and guidelines are more complicated than most people realize. Without the proper understanding, an IRA inheritance could spell disaster.
It is not unusual for IRA heirs to not know about or misunderstand some key rules and guidelines. And unfortunately, the IRS does not give much mercy at all when things are not done properly, even from ignorance of the rules. A wrong move can often cause much of the inherited IRA to end up with the IRS in the form of taxes. Here are some key inherited IRA mistakes that can be disastrous.
Inaccurate Or Wrong Documents – Your will or living trust has no effect on an IRA. Only the beneficiary designation form matters. IRA owners often make the mistake of using the wrong form or not designating a beneficiary all together.
Misplaced Documents – Make sure you keep your documents as not being able to produce them can cause big problems.
Not Knowing About Special Spousal Options – Spousal beneficiaries have special options available to no one else. Spouse’s who do not know or understand these special options can lose valuable money.
Not Realizing the Tax Issues – Most inherited IRA accounts are fully taxable to the beneficiaries. Fortunately, there are ways to minimize these taxes, but most people are not aware of them or do not follow the specific guidelines. Consequently, they lose out on the tax savings options and cost themselves money.
Inheriting money, specifically IRAs, is a complex process filled with many rules and guidelines. If not understood or followed properly, an inheritance can turn into a disaster.