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 advisor guiding you through the technical requirements for processing the account, your advisor should be able to help you with emotional angst of remaining loyal to inherited assets.
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 far from being 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 until you withdraw the money. 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, if 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? Click here for more information.
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 March 27, 2017. Updated July 2019.