If you inherit an IRA (Individual Retirement Account), it’s important to be aware of the regulations concerning transferring the account to you, the “beneficiary.” In addition to your financial advisors guiding you through the technical requirements for processing the account, they should help you with any possible emotional angst you inherited along with the monetary.
When a client recently called me about an inherited IRA, he said, “I want to sell some of the stocks in the account. Am I legally allowed? And if I do, am I being disloyal to my father’s memory by getting rid of what he bought?”
Personal finance is personal
This client is far from unusual in the loyalty he feels to his benefactor. Many beneficiaries feel as if they are betraying the person who left them the account if they change anything in it. But that is not the case.
When choosing investments, you need to have your own goals in mind, rather than those of the deceased, which may have been quite different. I told my client, “I’m sure your father wanted the best for you, which is why he made you beneficiary. Improving the IRA’s portfolio by acquiring investments that are more appropriate for your situation isn’t being disloyal. It’s actually the best way to make the most of the inheritance.”
How should you optimize the investments inside an IRA?
If you sell investments inside an inherited IRA, you don’t pay U.S. tax on capital gains. The U.S. taxes money only when it is taken out of the IRA. Be aware that generally you shouldn’t hold an annuity or other tax-advantaged investments like municipal bonds in an IRA. Furthermore, if you’ve made aliya, and you transfer the funds out of an IRA to an Israeli investment account, the funds immediately become taxable and would lose their U.S. tax benefits. Finally, there could be Israeli tax consequences, so be sure to speak with a qualified tax professional.
Not sure how to properly protect an IRA that you inherited? Go to Profile-Financial.com/inheritedira for more information.
Douglas Goldstein, CFP®, GFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published March 27, 2017. Updated July 2019. Updated February 2022