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 about the mistakes you should avoid if one day you receive an inheritance, and then check out our free interactive tool.
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 tax on the money they withdraw. Any money remaining in the account can continue to grow untaxed. 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IRA” (a.k.a. “stretch IRA”) and this maintains the tax-deferred status of the account until the money is eventually withdrawn.
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 (or 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.
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 $5.45 million (as of 2016). (Be sure to consult with a qualified tax advisor in case there’s any state or local estate tax.)
As I don’t give tax advice to clients, I always tell beneficiaries of an inheritance to consult tax professionals. I often work directly with clients and their accountants to make sure that their investments and tax obligations are handled properly.
If you’re getting an inheritance and you live in Israel, make sure to check out our free interactive tool.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published January 3, 2017.