3. The tax laws are complex and subject to change. This information is based upon current federal tax rules in effect at the time this was written.
At some point you may come into a large sum of money or property as the beneficiary of a deceased IRA holder or from a distribution to you as a retirement plan participant. Understanding the tax consequences may prove helpful.
IRA beneficiary
As an IRA beneficiary you have several options:
c Take a lump-sum distribution of the IRA now.1 Lump sums from traditional IRAs are generally subject to income tax, except for the amount of nondeductible contributions made to the IRA, while Roth IRA distributions may be free from taxation.
c Surviving spouse beneficiaries may treat an IRA received as a beneficiary as his or her own and name new beneficiaries to “stretch” the IRA to subsequent generations.2
c Nonspouse beneficiaries may take annual required minimum distributions over their own life expectancies and name a beneficiary to “stretch-out” their remaining IRA balance.
c Beneficiaries can withdraw the entire IRA balance at any time.3 Beneficiaries may take more than the minimum required amount from the IRA at any time.
Retirement plan lump sums
When the time comes to decide what to do with your distribution from an employer’s retirement plan, you may consider rolling the account balance into an IRA. You may have increased flexibility with your investment options and withdrawals. Be sure to initiate a “direct rollover” of these assets from your employer’s retirement plan or mandatory withholding of 20 percent of the distribution may apply for income taxes.
This information is based on current federal tax laws in effect at the time this was written. Morgan Stanley and its financial advisers do not provide tax or legal advice. Individuals are urged to consult their personal tax or legal advisers to understand the tax and related consequences of any actions or investments described herein.
Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley, 329-7979.
1. Withdrawals from a traditional IRA generally are subject to ordinary income taxes. Withdrawals from a traditional IRA or Roth IRA prior to age 591/2 may be subject to a 10 percent federal penalty. Exceptions apply, including the exception for withdrawals taken from an account for an owner’s death. Roth IRA withdrawals may be income tax-free under certain conditions. Required minimum distributions from traditional and Roth IRAs must begin by December 31 of the year after the IRA owner’s death, with exceptions that apply if the surviving spouse is the sole beneficiary.
2. A stretch IRA’s goal is to extend the period of tax-deferred earnings beyond the lifetime of the person who created the account. It may not be appropriate for a person who will need the money for retirement or short-term expenses. You should also consider possible tax law changes.
3. The tax laws are complex and subject to change. This information is based upon current federal tax rules in effect at the time this was written.