How to Dissolve an Inherited IRA

by Maggie McCormick

Inheriting an individual retirement account (IRA) can give you a tidy sum of money that you could use to pay off debt or make a large purchase, such as a home. Though you do have the option to roll the IRA over and take a little bit of money each year, you can also dissolve an inherited IRA to receive a lump sum amount. Note that you'll owe taxes on a traditional IRA, so figure the taxes into your spending plan.

Rollover the original IRA into an "Inherited IRA." The original IRA custodian can do this for you. You have the option of using the same company or a different one, but if you're going to simply dissolve the account, it's easiest to use the same company. At this point, the custodian will divide the account between named heirs, if necessary.

Request a cash distribution from the inherited IRA in your name. The specific process for this varies according to the custodian, but in general, there will be a request form that you will need to fill out.

Set aside money for taxes, if necessary. If you inherited a Roth IRA, you won't need to pay taxes on the money, unless the account was less than five years old, in which case you'll have to pay taxes on the earnings only. If you inherited a traditional IRA, you'll need to pay taxes on the full amount, at your current tax rate. The custodian should withhold 20 percent of the amount at the time of the distribution, but you may need to pay more. A tax adviser can tell you how much you'll owe.

Warning

  • Dissolving an IRA could make the funds vulnerable to debt collectors, or spouses in the case of a divorce. Keeping the money in an inherited IRA and withdrawing a bit each year generally keeps the funds protected.

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