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My name is Evan Vladem and I’m a partner and financial advisor at Associated Investor Services. I get it... talking about money can be intimidating... So, we created a judgement-free space where there are no "dumb" questions or embarrassing situations. Everything and anything is welcome, and we'll provide our best answers and/or guidance..
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I hope this message finds you well. I recently experienced the loss of my aunt. Despite the grieving, I find myself facing a rather overwhelming situation. I will soon be inheriting a Rollover IRA, an annuity, and a sizable individual brokerage account, which has accumulated significant investment gains over the years.
While I am grateful for this inheritance, I am also confused about the potential tax implications and how to handle these assets responsibly. I don't want to make any mistakes or miss out on any opportunities to optimize the financial outcome.
Could you please provide me with some guidance on how to navigate this situation? What steps should I take to ensure that I make informed decisions regarding taxes, investments, and any other considerations that may arise? I want to handle this inheritance responsibly and secure my financial future.
Thank you for your expertise and assistance in advance.
Inheritor in Need
Dear Inheritor in Need,
First and foremost, my condolences. I understand; inheriting assets can be overwhelming...especially when you’re trying to manage through grieving. I hope that I can provide some clarity to help you navigate this difficult situation.
With a Rollover IRA, since you inherited the assets after 2022 you’ll have three choices: open an inherited IRA (IRA-BDA), take a lump sum distribution or disclaim the assets. If your goal is to minimize taxation, the IRA-BDA may be the route for you to go. You can essentially stretch the IRA for 10-years. Each year, you would need to take required minimum distributions (RMDs) from the account. The assets remaining in the IRA-BDA wrapper will continue to grow tax deferred. After 10-years, the IRA-BDA would need to be distributed in full. Throughout the process, the assets you distribute would be considered taxable as ordinary income in the year you take them. Going the lump-sum route, you would recognize the entire amount as ordinary income immediately.
Regarding the annuity, you mentioned having both a qualified and non-qualified annuity. It is crucial to understand the differences between them. Qualified annuities are typically subject to RMDs (such as the IRA-BDA’s above), while non-qualified (taxable) annuities offer more flexibility. You may be able to stretch the non-qualified annuity and it’s taxation across a specified number of years – essentially extending distributions over a longer period to potentially optimize tax benefits and growth potential.
As it relates to the individual brokerage account with significant investment gains, one important factor to consider is a step-up in cost basis. When you inherit securities, such as stocks or mutual funds, the cost basis is adjusted to the value of the assets at the date of your aunt's passing. This step-up in cost basis can help minimize capital gains if you decide to sell the investments in the future.
A lot of information but I hope this gives you a bit of a better handle on things. Still, would highly recommend that you work closely with a tax professional and financial advisor with experience in estate planning and inheritance. No pressure, but I would be glad to help.
Evan Vladem, BFA™