Ask Liz Weston

Get smart with your money

IRA inheritance

Q&A: An update on the inheritor trying to stay below the poverty line

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Dear Liz: I have an update about a recent question in your column. A reader wrote that they had been low income but had recently inherited $175,000. You noted that Medicaid has strict asset limits. Actually, that is no longer the case in California, where Medicaid is known as Medi-Cal. I just received literature from it that says, “A new law means assets will not be counted during Medi-Cal renewals.”

Answer: Again, quite right! Some other states have increased asset limits for Medicaid, the government health program for the poor, but California is the first to remove asset limits entirely as of January 2024.

This column appears in different states, which can vary dramatically in their laws and policies. That’s why I constantly suggest getting personalized advice from attorneys, tax pros and financial planners. A column can dispense general education but can’t offer individualized advice tailored to the realities of where you live.

Q&A: The ins and outs of inherited IRAs

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Dear Liz: I have questions about inherited IRAs. A friend has designated me and three others as beneficiaries of her IRA. Is this to be considered community property with my husband? How can I inherit this as “sole and separate property”? Must taxes be paid on this? Also, may I give gifts of cash to relatives beforehand rather than naming them as recipients of my IRA and burdening them with taxes? If I do not name survivors to my IRA, what happens to my hard-earned money after I die?

Answer: Inheritances are considered separate property in every state, including community property states. If you commingle the funds — by depositing a withdrawal in a jointly held checking account, for example — then that money potentially becomes community property. You should consult a tax pro or financial planner about the rules governing non-spouse inheritors, since they’re somewhat complicated. You’ll pay income taxes on withdrawals from regular IRAs you inherit, but typically not from Roths.

You’re welcome to give anyone as much as you want, and they won’t have to pay taxes on the gift. You could owe taxes if you give away enough money, but that’s unlikely. You have to file a gift tax return if you give more than $15,000 per recipient in a given year, but you won’t actually pay gift taxes until the amounts you give away over that annual exclusion limit exceed your lifetime limit, which is currently $11.2 million.

If you’re concerned about taxes, though, naming people as IRA beneficiaries is often a smarter tax move than not doing so and having your estate inherit the money.

If your estate is the beneficiary, the money typically would have to be paid out to your estate’s heirs — and taxed — faster than if specific people were named. Your heirs might have to empty the account within five years, or the IRA custodian may opt to distribute the whole amount to the estate in one taxable distribution. Naming people, on the other hand, may allow the option of stretching the IRA, which means taking distributions over their lifetimes. The tax-deferred money that remains in the account can continue to grow. This is another topic to discuss with your advisor.