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Greatest Wealth Transfer Could Be Costly Blunder for Beneficiaries and Windfall for IRS



Last Updated: Aug 1, 2017
If you inherited your parent’s retirement account, the IRS could potentially take a huge portion of it. Here’s what you need to know to avoid an expensive mistake.

Anyone who just inherited a deceased parent’s IRA or 401(k) could be about to commit a costly blunder.

You can take the money from that retirement account in one big lump sum, no matter how young you are, but that will trigger a tax bill – probably a hefty one.

“It’s tempting to take the lump sum, especially if it represents a huge windfall of cash for you,” says wealth management advisor Rebecca Walser of Walser Wealth (www.walserwealth.com). “But you should be aware it’s also a windfall for the IRS.”

Walser, a successful tax attorney and certified financial planner who specializes in working with high net worth clients, says this issue will become an even more common one in the coming years as the aging Baby Boomers die off, transferring their wealth to their Generation X and Millennial offspring.

Some have called it the greatest wealth transfer in history, as over the next few decades the Boomers are expected to leave about $30 trillion in assets to their children and grandchildren.

Part of that money is in tax-deferred retirement plans such as a traditional IRA or an employee-sponsored 401(k) that Baby Boomers have been contributing to for decades.

They didn’t have to pay taxes on the money they contributed to those plans until they started withdrawing the money in retirement. But just to ensure those taxes aren’t deferred forever, the government requires a minimum withdrawal each year once the account holder reaches age 70½.

The IRS also isn’t picky about who does the paying, Walser says. It’s fine with collecting the taxes from heirs if the retiree dies before spending all the money.

A spouse who inherits such an account falls under different rules, but Walser has advice for anyone else who finds themselves in this situation:

“Maybe you really do need the money, so taking the lump sum makes sense,” Walser says. “But I think most people who do that are going to regret it later, especially if they just blow all the money right away and don’t have anything to show for their inheritance.”

About Rebecca Walser

Rebecca Walser is a licensed tax attorney and certified financial planner who specializes in working with high net worth individuals, families and businesses at Walser Wealth (www.walserwealth.com). She earned her juris doctor degree from the University of Florida and her masters of law degree in taxation from New York University. 

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