Key takeaways
The rules around inherited IRAs are different for spouse and non-spouse beneficiaries.
Non-spouse beneficiaries can open and transfer funds into an inherited IRA, take a lump-sum withdrawal or turn down the inheritance. Spouse beneficiaries can roll the funds into an existing IRA account or open a new account.
Required minimum distributions (RMD) rules vary based on what type of account is inherited, when the account was inherited and your beneficiary designation.
An inherited IRA is an individual retirement account (IRA) you open when you’re the beneficiary of a deceased person’s retirement plan. Most types of IRAs or workplace retirement plans can be transferred to an inherited IRA, including traditional, Roth, SIMPLE, and SEP IRAs, as well as 401(k) plans.
Being the beneficiary of someone’s retirement account is an honor, as they’re trusting you with some of their life savings. But inheriting an IRA also comes with responsibilities. Depending on the capacity in which you’re receiving the inheritance, there are different options available to you and requirements to consider. If you’re the spouse of the original account owner, you have some additional options as a spouse beneficiary.
Options for an inherited IRA
When you receive access to the original owner’s account, you can choose to do one of the following:
Transfer funds
Open your own inherited IRA.
- IRA balance continues tax-deferred growth
- Option to make withdrawals immediately without penalty
Considerations:
- Tax implications will depend on the type of IRA you’ve inherited
- IRA balance must be emptied within 10 years; this distribution period begins the year after the original IRA owner’s death
- You cannot make additional contributions or roll into other retirement accounts you hold as participant
Take the cash
Action: Take the inheritance in a lump-sum withdrawal for access to the funds immediately.
Consideration: You could pay income taxes on the taxable portion of the distribution and possibly be moved into a higher tax bracket.
Turn it down
Action: Choose not to accept the inheritance.
- You may feel the next eligible beneficiary would benefit from it more
- Action needs to be taken within nine months of original owner’s death
Consideration: This option is complicated and should be discussed with an attorney prior to selection.
Roll into existing or new IRA (spouse only)
Action: If you’re the spouse beneficiary, you can roll the inherited assets into your own existing IRA account or into a new account in your name.
Considerations:
- The required distribution rules and withdrawal penalties for IRAs are the same as if you had always owned the assets
- Rolling the assets into your own IRA works best if you’re past age 59 1/2. RMDs begin at age 73, or if you’re already 73, RMDs continue based on your age
- A 10% tax penalty may apply for withdrawals taken before age 59 1/2
These options can be affected by the type of account you’re inheriting and the age of the original account holder. Speak with a tax or financial professional to discuss your options.
Required Minimum Distributions (RMDs) for non-spouse beneficiaries
RMDs from inherited IRAs are significantly different for most non-spouse beneficiaries.
Traditional IRA
- The IRA balance must be emptied within 10 years; this distribution period begins the year after the original IRA owner’s death. A distribution is not required each year
Roth IRA
- The IRA balance must be emptied within 10 years; this distribution period begins the year after the original IRA owner’s death. A distribution is not required each year
- Distributions are tax-free if they meet the five-year holding requirement
Certain eligible designated beneficiaries are exempt from these changes:
- Surviving spouse
- Minor child of original IRA owner
- Disabled or chronically ill beneficiary
- Beneficiary who is not more than 10 years younger than original IRA owner
Additionally, these changes do not apply to IRAs inherited prior to December 31, 2019. You’ll want to talk with a tax or financial professional about your specific situation.
Opening an inherited IRA
If you decide to transfer the funds and open an inherited IRA, make sure you have:
- A death certificate
- Inherited IRA account application
- Relevant paperwork verifying your beneficiary designation
- The title of the account which should include both your name as beneficiary and the deceased’s name as the original account holder
Be sure to consult a financial professional to use an inherited IRA in way that works best for your situation.
Ready to open an IRA? We have options to meet your needs.
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