Spending vs. Investing Your Inherited IRA Assets


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By naming you as a beneficiary, the original account owner has given you the opportunity to enhance your own financial security. With an Inherited IRA you can stretch out your IRA assets by taking advantage of tax-deferred growth and annual minimum required distributions.

This is a hypothetical example of a $100,000 IRA inherited by a 45-year-old beneficiary. Assumptions include an 7% annual rate of return and a 25% federal tax bracket with reinvestment of income dividends and capital gains distributions. The ending values do not reflect fees, inflation, or any distributions taken. MRDs are taken at the beginning of each year based on the single life expectancy of the beneficiary and invested in a taxable account. IRS rules and life expectancy tables are used for this example.

Even if you have short-term financial obligations, you may want to avoid taking all of your IRA inheritance in cash, for two reasons:


•		Short-Term Tax Drain—if you cash out an IRA inheritance, you'll lose a significant portion of those assets to income taxes. Any withdrawals from non-Roth Inherited IRAs will likely be taxable as income in the year they're taken.
•		Long-Term Loss of Earnings Potential—the more you withdraw from an Inherited IRA now, the less you have to build on for the future. Given that these assets could continue to compound tax-deferred as long as they remain in the account, this "lost opportunity" cost can be quite substantial, as illustrated in the above chart.

Although you must withdraw at least a minimum amount from your Inherited IRA assets each year, it's generally based on your age rather than the age of the original IRA owner.

If you are younger than the original IRA owner, this may minimize the taxable amount that must be withdrawn each year.

The information provided by Fidelity Investments is general in nature and should not be considered investment, legal or tax advice. Fidelity does not provide investment, legal or tax advice. Consult with a legal or tax professional regarding your unique tax situations.


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