If someone left behind tax-advantaged retirement funds for you, there are some points you need to carefully examine in order to make the most of your inherited individual retirement account (IRA).
What Is an Inherited IRA?
An inherited IRA is a type of retirement account opened in a beneficiary’s name after the original account owner passes away. Here are some quick
facts about inherited IRAs:
- Additional contributions can’t be made into inherited IRAs.
- Most non-spousal beneficiaries must empty the account within 10 years, as a result of the Secure Act of 2019 and the Secure 2.0 Act.
- Inherited IRAs must be the same account type (e.g., traditional or Roth) as the original account.
But depending on factors like your age and relationship to the deceased, there are various rules that dictate how IRAs work. These
beneficiary rules impact taxes and required minimum distributions (RMDs) or the amount of money you must withdraw from your retirement plan after reaching age 73.
To understand how inherited IRAs work, it’s best to start by looking at your relationship to the original account owner.
Inherited IRAs for Spouses
If you’re the spouse of the original retirement account holder, you generally have the most options when it comes to inherited IRAs.You can choose to take a lump-sum distribution of all assets from the original account. However, this payment would be taxed as ordinary income if the original account holder left behind a traditional IRA. If you inherited Roth IRA funds—more on that later—withdrawals are tax free.
Furthermore, you can also rollover the inherited assets into your own IRA. But your IRA must be the same account type as the original account. So, if the deceased had a traditional IRA, you must rollover its funds into a traditional inherited IRA. If the original account was a Roth IRA, it must be rolled over to an inherited Roth IRA.
Also keep in mind that as a spouse, you have 60 days to rollover the original account funds into your own IRA without facing taxes or penalties.
When you rollover inherited assets into your own IRA, you could delay taking RMDs until you reach age 73. This could allow you to let your account keep growing. Once you reach age 73, you can calculate your RMDs based on your life expectancy as determined by the
IRS.
As a spousal beneficiary, you can also transfer the original account funds into an inherited IRA in your name.
In that case, this
link will lead you to some general RMD guidelines offered by the IRS.
If the original account owner died in 2020 or later before reaching RMD age, you have the following options:
- Delay taking distributions until the original account holder would have turned 72.
- Take distributions based on your own life expectancy.
- Withdraw all funds within 10 years after the original account owner passed away.
Non-Spousal Beneficiary
If you inherit an IRA from someone who isn’t your spouse, the rules are quite different.
You’re not allowed to roll inherited funds into your own IRA. You’d need to transfer these assets into your own inherited IRA. And you’d generally have 10 years after the death date of the original account holder to withdraw all funds from the account.
But there’s an exception for non-spouse beneficiaries who meet the following criteria:
- minor child of the original account holder
- disabled person
- chronically ill person
- person who is not more than 10 years younger than the account owner
Together with spousal beneficiaries, they fall into a category officially recognized by the IRS as eligible designated beneficiaries.
These individuals can take RMDs based on their own life expectancy. But if the original account owner died before reaching RMD age, that eligible designated beneficiary must follow the 10-year rule.
What If I Inherited a Roth IRA?
One of the major benefits of having a Roth IRA is not being subject to RMD rules. Inherited Roth IRAs, however, work a bit differently.If you inherited a Roth IRA, you generally need to follow the same RMD rules as a traditional IRA,
according to the IRS. This means that RMDs for Roth IRAs also ultimately depend on your relationship to the original owner and your age.
Here, too, spouses and other eligible designated beneficiaries have the most flexibility. And most non-spousal beneficiaries need to withdraw the funds within 10 years.
But withdrawals from inherited Roth IRAs are tax-free as long as the inherited account has been open for at least five years.
The Bottom Line
Inherited IRAs can give your finances a boost and fuel your retirement savings thanks to the generosity of a loved one. But inherited IRAs are tangled up in complex tax laws that can change at any moment. But what it boils down to is your relationship to the deceased. You should focus on exploring the options available depending on the category you fall into. It’s also imperative that you seek the guidance of a qualified tax adviser before making any decisions with an inherited IRA.The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
