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Inherited investments: Steps to take for beneficiaries

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If you've inherited an IRA, sit down with a tax professional or financial advisor to discuss the IRS rules governing these types of accounts.

 

Liquidate the investments and withdraw the cash

There's always the option to liquidate inherited investments, and this might be a match for your goals if:

  • You immediately need the money for other expenses.
  • You have inherited a Roth IRA and can withdraw the money at any time tax-free and without penalty.
  • You prefer to invest outside of the stock market in assets like real estate.

 

Special considerations for inherited retirement accounts

For inherited retirement accounts, different IRS rules apply2 depending on:

  • Your age.
  • The age of the deceased account holder.
  • Your relationship with the deceased account holder (non-spouse, spouse, or minor child).
  • Required Minimum Distribution (RMD) requirements.

Before liquidating any inherited investments, and especially inherited retirement accounts, it's always wise to sit down with your tax advisor or financial advisor. There may be tax penalties for withdrawing assets in a retirement account before you reach a certain age. There can also be tax benefits to keeping the inherited investments in a tax-advantaged account.

A financial professional can review the investments and types of accounts you've inherited and offer the tax implications for each possible action you could take with the account.

 

Decide where to keep the accounts

Some custodians also require that you transfer your assets to a new account within their firm. Once your new account is open, where you ultimately decide to house your accounts will likely have a lot to do with what you decide to do with the assets inside.

Once you have a plan of action for your inherited investments, you might consider keeping the investments in place with their current custodian if:

  • You aren't sure yet what you'll do with your inherited investment.
  • Your spouse passed away, and you held your accounts with the same custodian.
  • You've inherited shares of company stock from a loved one's previous employer or a direct stock purchase plan, and moving the stock could be cumbersome.

You might choose to transfer your inherited assets to a different custodian if:

  • You've inherited a taxable brokerage account and prefer to consolidate your investments into a single account at a single custodian.
  • Your spouse passed away, and you want to roll their IRA over into your existing IRA at another custodian.

With inherited investments, especially inherited retirement accounts, there are a few more moving parts to consider than with a life insurance policy. However, inherited investments allow you to reap the rewards of a loved one's lifetime of savings. Be sure to understand the tax implications before you liquidate any accounts. You can also speak with a tax professional or financial advisor to help you receive your inheritance and then put a plan to manage the assets.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Adam Barone, "Custodian Definition," Investopedia, updated April 29, 2020, accessed September 10, 2020. Back
  2. IRS.gov, "Distributions from Individual Retirement Arrangements (IRAs)," accessed September 10, 2020. Back