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 minimum required distributions. Of course, investing has risks so you'll want to take a long-term perspective and be prepared to "ride out" the market's ups and downs.

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.

A change in IRS regulations makes it easier to maximize the benefits of inheriting IRA assets. Although you still must withdraw at least a minimum amount from your Inherited IRA assets each year, it's now generally based on your age rather than the age of the original IRA owner.

If you are younger than the original IRA owner, this rule can minimize the taxable amount that must be withdrawn each year and maximize the amount that can remain in the account to continue compounding tax-deferred.

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


	Consider Professional Money Management

	Fidelity Portfolio Advisory Service^® is a professional money management service for investors with $50,000 or more to invest in an account. Learn about the benefits of using Fidelity Portfolio Advisory Service^®. Or call 800-544-3455 to discuss your options with a specialist.


	Giving to Charity From Your IRA

		If you're over 70 1/2, new legislation allows you to donate the taxable portion of an IRA directly to a qualifying tax-exempt charity in 2007 without triggering any federal income taxes.

		This favorable new rule for "qualified charitable distributions" is only available for 2006 and 2007, with a maximum contribution of $100,000 for each year.

		Contact Fidelity For more information: Call a Fidelity Retirement Specialist at 800-544-4774.