Inherited Self-Directed IRA -Make Sure Your Heirs Know What To Do With It

Many of our clients have done extremely well with their Self-Directed IRA.

They have a combination of experience, skill and knowledge that allows them to invest with their Self-Directed IRA at well-above market rates in specific areas like real estate, precious metals, and small businesses (LLCs and partnerships as well as C-corporations) within their own areas of expertise.

This is not necessarily true of heirs, though. To help ensure you pass on a lasting legacy to your children, grandchildren and other heirs, you may want to consider having a family meeting to discuss how to handle any assets that, through some oversight or procrastination on your part, were left unspent on golf, cruises and other life pleasures when you pass on.

  • Work out a strategy with your spouse. Surviving spouses have more choices when it comes to inherited IRAs than other heirs do. They can choose to keep taking distributions on the original schedule, or retitle the IRA as their own asset. Generally, the correct course of action, all other things being equal, is to take whatever course of action allows you to leave the assets to compound within the Self-Directed IRA as long as possible. However, you must obviously balance that against immediate income needs, as well. Having a solid life insurance plan in place helps preserve a surviving spouse’s options.
  • Warn heirs against cashing out right away. Inherited IRAs come with valuable tax benefits, but your heirs can only benefit from the tax-deferral of an inherited IRA (or the tax-free growth in an inherited Roth IRA) if they are patient and don’t sell off all the assets and cash out the account right away. It’s ok to move money into investments they are more comfortable with and better suit their own longer time horizons. But impress upon your heirs the importance of patience. You don’t get all the eggs by killing the goose right away. It pays to wait, and take these tax-deferred distributions over time.

At a minimum, tell them to see an adviser before making any moves with an inherited IRA or other retirement account.

  • Warn non-spouse heirs of the 5-year rule, which applies to traditional IRA accounts and 401(k)s. This means that if they don’t opt to take money out of the IRA according to the required minimum distribution schedule, they will have to liquidate the account within five years. This can generate huge taxes and penalties. You almost never want to do this if you don’t have to.
  • Double-check the named beneficiaries on your Self-Directed IRA, conventional IRA and other retirement accounts. It is vital to have beneficiaries listed by name in order to preserve the tax advantages of inherited Self-Directed IRA Don’t forget secondary/contingent beneficiaries. If you don’t name a beneficiary, then the Self-Directed IRA will become part of your estate – and automatically subject to the five-year rule.
  • Ensure your heirs know there is a timeline. They can’t inherit an IRA and then do nothing for over a year while they grieve the loss. Non-spouse beneficiaries have to take the first of any required RMDs by December 31st of the calendar year following the year the original owner of the IRA died. Blow that deadline and you lose the option to spread out distributions over a lifetime. You have to take everything within five years – costing taxes, penalties and opportunity cost.
  • Introduce your heirs to your team of advisors. If they’ve been doing a good job for you, they’ll probably do a good job for your heirs, too – even if that means helping them move assets into investments that better serve their needs at their current stage in life.

American IRA, LLC is a nationwide provider of administrative and transaction services for Self-Directed IRAs, 401(k)s, SIMPLEs, SEPs, Coverdells and Health Savings Accounts. With offices in Charlotte and Asheville, North Carolina, American IRA works with Self-Directed IRA owners and other entrepreneurially-minded investors all over the country.

For more information, call us today at 866-7500-IRA(472), or visit our website and our vast library of information on self-directed retirement accounts at

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