07 Jul Passing inherited IRA to your children

Q. I received an inherited IRA from my sister. I don’t really need the money because I have a pension and Social Security. I want to leave the money to my children. Should I take Required Minimum Distributions and invest them, or just take the whole thing at once to invest a lump sum?
— Planning

A. It’s very generous that you want to leave this money to your children, but the IRS still wants its piece.

As owner of the inherited IRA account, you are responsible for taking the Required Minimum Distributions (RMDs) each year.

This will be taxable income to you, said Taylor Thomas, a certified financial planner with Round Table Wealth Management in Westfield.

“Depending on the amount of funds in the inherited IRA and your marginal tax rate, it may make sense if you only take the minimum distribution each year as this could save you some tax dollars,” Thomas said.

First, though, he said you should consult with your tax advisor in order to confirm the appropriate amount of federal and state taxes that should be withheld from the distribution in order to avoid a large tax liability when you file your taxes.

Thomas said you can take the distribution funds — less any tax payments — and move them to taxable investment or savings accounts for the benefit of your children.

“If your children are still minors, a guardian account — Uniform Transfer to Minor Account — can be used to hold the funds, he said. “If they are adults, you can use Transfer on Death accounts, should you wish to retain access in order to be able to monitor and manage the funds.”

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This post was first published in July 2017.