Whenever we here the letters “IRA” we get a picture in our mind of an investment that has some kind of tax benefits and consequences to it. We know that the money that’s made inside an IRA is not taxed until it is removed. We know that when we put money into an IRA we get to deduct it from our income tax. Most people know that at 70 ½ (or the year following), we have to start taking money out of the IRA and pay ordinary income tax on that amount. But that is about the extent of people’s knowledge of what an IRA is and what it does.
But when it comes to inheriting an IRA, most people are completely in the dark. Not knowing how to set up and transfer an IRA upon the death of the original owner can cause an irrevocable tax nightmare. Let’s start with the first person in line.