Contact Us
Make My Homepage

Options for inherited IRA distributions

480430469
Alex_Schmidt

Q. I’ve been a good saver in my 401(k) plan, but I don’t have much else. Now I have an inherited IRA that I need to take distributions from. Am I better off putting the money in an IRA or saving in a different account that I can access any time? I’m 42.
— Saver

A. This is a multi-part question, so let’s walk through this a step at a time.

First, saving a portion of your salary in your company’s 401(k) plan is a great financial habit to help prepare for your non-working years, said Jodi Cirignano, a certified financial planner with Lassus Wherley in New Providence.

She said the government strongly supports this habit and offers tax incentives to encourage people to save in 401(k)s and in other retirement accounts such as IRAs.

“However, the government also imposes penalties to discourage use of the funds prematurely, so it’s important to have a cash reserve so you don’t have to tap retirement accounts for living expenses or emergencies,” she said.

Before you set aside additional dollars into an individual IRA, Cirignano recommends you evaluate your cash needs and reserves.

“As a general rule of thumb, maintaining a reserve of three to six months of expenses is a sound practice,” she said. “You may need more or less than this level depending on your individual circumstances, such as job stability and your financial responsibilities, so it’s important to review your cash needs periodically.”

As for your inherited IRA, this is a special type of IRA, and you have some distribution choices that can work to your advantage.

As you correctly point out, Cirignano said, you must take distributions from the account, which are subject to federal and state income taxes.

“In general, as a non-spouse IRA beneficiary, you can take a lump sum distribution, withdraw the entire amount by the end of the fifth year after the IRA owner passed away or take distributions over your life expectancy (`stretch IRA’),” she said. “Since you mentioned that you don’t have much outside of retirement accounts, you should consider setting aside all or at least a portion of your distributions from the inherited IRA in a non-retirement account.”

Depending on your situation, Cirignano said, the stretch IRA option can be an attractive choice for you. You will receive the minimum required distribution amount each year from the inherited IRA, but the remaining account balance will continue compounding tax-deferred to help you further grow your assets, she said.

“And, if circumstances changed and you needed access to additional funds, you can take distributions above the minimum required amount at any time from the inherited IRA,” she said. “By stretching the IRA, you may be able to meet your goal of optimizing tax-deferred assets as well as having flexibility to access funds as needed.”

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter

Sign up for the NJ1015.com Newsletter

Get the best of NJ1015.com delivered to your inbox every day.

Best of NJ101.5

Recommended For You

Best of the Web

Leave a Comment

It appears that you already have an account created within our VIP network of sites on . To keep your personal information safe, we need to verify that it's really you. To activate your account, please confirm your password. When you have confirmed your password, you will be able to log in through Facebook on both sites.

Forgot your password?

*Please note that your prizes and activities will not be shared between programs within our VIP network.

It appears that you already have an account on this site associated with . To connect your existing account just click on the account activation button below. You will maintain your existing VIP profile. After you do this, you will be able to always log in to http://nj1015.com using your original account information.

*Please note that your prizes and activities will not be shared between programs within our VIP network.

Please fill out the information below to help us provide you a better experience.

(Forgot your password?)

Not a member? Sign up here

Sign up for New Jersey Insiders quickly by connecting your Facebook account. It's just as secure and no password to remember!

Sign up to have exclusive New Jersey Insiders contests, events, coupons, presales, and much more delivered to you for FREE.