Inheriting an IRA is a bittersweet experience – on the one hand, you’ve lost a loved one, but on the other, you’ve received a financial windfall. If you’ve found yourself in this situation, it’s important to know what to do with your inheritance. IRA rules and regulations can be complex, and making the wrong move can lead to significant tax penalties. To help you navigate the process, we’ve put together this guide on what to do if you inherit an IRA.

Familiarize yourself with rules and regulations

The first step in managing your inherited IRA is to familiarize yourself with the rules and regulations that apply to your situation. If you inherited a traditional IRA, you’ll need to start taking Required Minimum Distributions (RMDs) by December 31st of the year following the account owner’s death. The amount you’re required to withdraw is calculated based on your life expectancy and the account balance. If you inherited a Roth IRA, you’re not required to take RMDs, but you will need to take them if the account owner was over 70 ½ at the time of their death.

Don’t take a lump sum payout

It can be tempting to take a lump sum payout of your inherited IRA, especially if you have immediate financial needs. However, taking a lump sum payout can trigger significant tax consequences. The IRA will be subject to income tax, and if you’re under 59 ½ years old, you’ll also be subject to an additional 10% tax penalty. Instead of taking a lump sum payout, consider taking distributions over time to spread out the tax burden.

Move distributions into a traditional retirement account

If you inherit a traditional IRA, consider moving the distributions into a traditional retirement account, such as a 401(k), 403(b), or traditional IRA. Doing so can postpone or eliminate taxes, depending on your individual situation. You might also be able to defer RMDs for a longer period of time by moving the funds into a retirement account in your own name.

Don’t put off making a plan

Inheriting an IRA can be overwhelming, but it’s important not to procrastinate. In order to avoid tax penalties and make the most of your inheritance, you’ll need to act quickly. Set up a meeting with a financial advisor to review your options and make a plan that’s tailored to your specific financial goals. Your advisor can also help you navigate the rules and regulations that apply to inherited IRAs, ensuring that you stay in compliance with the law.

Inheriting an IRA can be both a blessing and a burden. To make the most of your inheritance, familiarize yourself with the rules and regulations that apply to your situation, and don’t take a lump sum payout. Instead, consider moving distributions into a traditional retirement account to avoid taxes and defer RMDs. And don’t procrastinate – make a plan with a financial advisor as soon as possible to ensure that you’re managing your inheritance effectively. With the right approach, your inherited IRA can provide long-term financial security for you and your loved ones.