What happens if I cash out an inherited IRA? This is a question that many individuals ponder when they inherit an IRA from a loved one. Understanding the implications of cashing out an inherited IRA is crucial, as it can have significant tax and financial consequences. In this article, we will explore the potential outcomes of cashing out an inherited IRA and provide you with the information you need to make an informed decision.
When you inherit an IRA, you have several options on how to handle the account. One of those options is to cash out the inherited IRA, which means you would withdraw all the funds from the account. However, it is important to consider the following factors before deciding to cash out:
1. Tax Implications: When you cash out an inherited IRA, the funds are considered taxable income. The amount of tax you will owe depends on the type of IRA (traditional or Roth) and the amount of the withdrawal. In some cases, the entire withdrawal may be taxed, while in others, only a portion may be taxed.
2. Early Withdrawal Penalties: If you are under the age of 59½, you may be subject to an early withdrawal penalty of 10% on the taxable portion of the withdrawal. This penalty can significantly reduce the amount of money you receive from the inherited IRA.
3. Required Minimum Distributions (RMDs): If you inherited an IRA from someone who passed away before reaching the age of 72, you are still required to take RMDs each year. If you cash out the entire IRA, you would no longer be subject to these RMDs, but you would need to plan for other sources of income to meet your financial needs.
4. Long-Term Financial Planning: Cashing out an inherited IRA may provide you with a significant amount of cash, but it is important to consider the long-term financial implications. This money could have potentially grown significantly over time if left in the IRA.
5. Options for Non-Spousal Beneficiaries: If you are not the spouse of the IRA owner, you have several options for handling the inherited IRA. You can take the funds as a lump sum, receive the funds as a series of payments, or convert the inherited IRA into a new IRA in your name.
6. Spousal Beneficiary Options: If you are the spouse of the IRA owner, you have more flexibility in how you handle the inherited IRA. You can roll the inherited IRA into your own IRA, take RMDs based on your life expectancy, or even transfer the funds to a new IRA in your spouse’s name.
In conclusion, cashing out an inherited IRA can provide you with a substantial amount of cash, but it is essential to consider the tax implications, penalties, and long-term financial planning. Before making a decision, consult with a financial advisor or tax professional to understand the potential outcomes and determine the best course of action for your specific situation.
