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Stretch out an inherited IRA

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in Small Business Tax

Suppose you’ve inherited an IRA from a parent or other relative besides your spouse.

Generally, the tax law re­quires you to empty out the inherited IRA in no longer than five years.

Strategy: Roll over funds to a separate IRA in your name. Then you can leisurely withdraw funds under IRS-approved life expectancy tables. This technique is often referred to as a “stretch IRA.”

In addition, spreading out IRA distributions over time can also effectively reduce the overall tax bite. Because you’re taking smaller annual distributions, it’s likely you’ll be paying tax at lower rates in most of those years.

However, you must be careful to observe all the technicalities in this area. Otherwise, you lose the tax benefit of the rollover.

Background information: Prior to the Pension Protection Act of 2006 (PPA), a nonspouse beneficiary of a qualified retirement plan such as a 401(k) couldn’t transfer inherited funds to his or her own IR...(register to read more)

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