Over the next few decades, baby boomers are expected to leave about $30 trillion in assets to their children and grandchildren. If you’re on the receiving end, make sure it is a blessing as intended, instead of a costly, bungled opportunity.
Here are some mistakes to avoid if you inherit your parent’s IRA or 401(k).
Keep your perspective: “Don’t view this as ‘found money.’ Your mom or dad worked hard to create this asset; don’t screw this up,” says Lou Cannataro, partner at Cannataro Park Avenue Financial in Manhattan.
Forget about withdrawing all the money at once. “Depending on your tax bracket, you could lose 25 percent to 45 percent in taxes,” Cannataro warns.
Know the rules: “You have to take out a minimum from the account every year. Go to the IRS website and search for ‘beneficiary IRA minimum distributions’ to get information,” says John Burke, CEO of Burke Financial Strategies in Iselin, New Jersey.
Right after you inherit the IRA, if your father or mother was older than 70, you will have to determine if they took their last minimum distribution from the account. “Let an estate tax attorney handle this. If you are the executor of the estate, get tax advice from an accountant; this could be complicated,” Burke says.
David Wechsler, a partner at the law firm Moritt Hock & Hamroff in Garden City, points out, “While a distribution from an IRA is taxable income, since the estate paid federal estate tax on the asset, a beneficiary may get an income tax deduction for estate taxes paid.”