You have several options when you inherit an IRA, so it’s no wonder that most people on the receiving end have questions about taking distributions, tax implications, and incorporating the inheritance into their existing financial plan. For starters, it helps to distinguish if you’ve inherited the IRA from a spouse or someone else.
For spousal beneficiaries, you can roll over the inherited IRA into your existing IRA and the earnings will continue to grow tax-deferred. You won’t have to start taking required minimum distributions (based on life expectancy) until you reach age 70 ½, but you’ll pay a 10% early-withdrawal penalty for funds you take from the account before age 59 ½.
Spousal beneficiaries are also entitled to any of the methods available to non-spousal beneficiaries, which include:
- Lump-sum payment: when you’re taking the money from an inherited traditional IRA, you won’t be charged a 10% early withdrawal penalty, even if you’re under age 59 ½, though you will still have to pay taxes on the money.
- Five-year distribution plan: there are no required minimum distributions, but all the money will need to be withdrawn from the account by the end of five years.
- Life expectancy method: if the original owner was older than the beneficiary, the beneficiary can use their own age and the IRS Single Life Expectancy Table to calculate how much they’re required to withdraw from the account each year (failure to take out the minimum requirement will result in a 50% penalty on the amount that was not withdrawn on time).
It’s important to note that non-spousal beneficiaries aren’t permitted to roll an inherited IRA into an existing IRA, and they must begin withdrawing assets no later than December 31 of the year after the account holder passed away.
Roth IRAs can usually be inherited tax-free, but you can’t keep the funds in the account forever. Non-spousal beneficiaries have to take annual distribution from the account based on their life expectancy (using IRS guidelines), starting the year after the original IRA owner dies, while spouses have the option of rolling a Roth IRA into their own account. Another option is to withdraw all of the money in the account within five years.
If you are in a similar situation and have questions about an inherited IRA, please feel free to contact me via email at firstname.lastname@example.org.