When receiving an inheritance, it’s important to avoid making tax mistakes. Certain tactics, such as opening a U.S. brokerage account (see below for an interactive tool) can help. Watch out for these mistakes:
Mistake #1 – Taking money out of an IRA
To maintain the tax-deferred status of an inherited IRA (Individual Retirement Account), the money must remain in a specially titled account. As an heir, you can transfer the IRA into a “beneficiary IRA” (a.k.a. “stretch IRA”) and not pay taxes on the account’s capital growth until money is withdrawn. Transferring the money overseas jeopardizes the tax beneficial status. As many overseas bankers and investment advisors may not know this crucial piece of information, work with professionals who are well-versed in cross-border investing and tax law.
Mistake #2 – Choosing the wrong investments for an IRA
The IRS allows U.S. citizens not to pay capital gains tax (or tax on interest and dividends) when they sell stocks for a profit inside an IRA. Since you don’t pay capital gains tax on profits, your growth is compounded, because you’re not giving a piece away every year to the government. Generally, annuities, municipal bonds, and other tax-advantageous investments should not be part of an IRA.
Mistake #3 – Not strategizing for estate tax
American citizens who bequeath their estates to their American children are exempt from estate tax if the estate (as of 2015) is under $5.4 million. If you think your future inheritance will be above that amount, strategize with your investment advisor and tax professional to minimize potential taxes. If you live in a different country than your beneficiary, make sure that your strategy includes avoiding tax mistakes.
If you think you might inherit an American IRA, use this free interactive tool to help you realize why opening a U.S. brokerage IRA account may be a good tax saving strategy. Try it at and then call our office with questions (02-624-2788).
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 August 23, 2016.