A new client recently told me, “My late father left me an inheritance of an IRA (Individual Retirement Account) worth $1.5 million, and I’m the sole beneficiary. What should I do with it? If I bring the money to Israel, I’ll have to sell the stocks and wire the money to my account here. But if I do that, I’ll have to pay tax in the United States and maybe Israel, too.”
Unfortunately, many beneficiaries make costly money mistakes. Read below about the mistakes you should avoid if one day you receive an inheritance, and then use the free interactive tool at Profile-Financial.com/interactive to guide you through opening a U.S. investment account.
Don’t take money out of the IRA
If a beneficiary withdraws the funds from the IRA, he’ll lose a fantastic American tax benefit. People with regular IRAs only pay U.S. tax on the money they withdraw. Any money remaining in the account can continue to grow untaxed in America. An inheritor can transfer the original IRA into a “beneficiary IRA” (a.k.a. “stretch IRA”) and this maintains the tax-deferred status of the account until the money is eventually withdrawn. Note that as of 2020, there is a ten-year window for withdrawing funds from newly created beneficiary IRAs. Consult an American accountant for more information.
No U.S. capital gains tax on sales inside an IRA
According to IRS rules, U.S. citizens holding IRAs don’t pay capital gains tax (nor tax on interest and dividends) when they sell stocks for a profit inside their account. This is a huge benefit when compounded over many years. (Check with your Israeli accountant regarding your Israeli tax obligations.)
Probably no estate tax
U.S. citizens who leave their estates to their American-citizen spouses or children don’t have to pay estate tax as long as they don’t exceed the “federal estate tax exemption,” which is over $11 million (as of 2021). (Be sure to consult with a qualified tax advisor in case there’s any state or local estate tax.)
I often work directly with clients and their accountants to make sure that their investments and tax obligations are handled properly. Once the money is in the inheritors’ names, I work with them to properly invest the funds to meet their own financial goals, giving consideration to their tax liabilities.
If you’re getting an inheritance, call 02-624-2788, and also check out our free interactive tool at Profile-Financial.com/interactive
Douglas Goldstein, CFP®, 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 January 3, 2017. Updated December 2020, Updated December 2021