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.
When you receive access to the original owner’s account, you can choose to do one of the following:
Open your own inherited IRA.
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.
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.
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.
RMDs from inherited IRAs are significantly different for most non-spouse beneficiaries.
Certain eligible designated beneficiaries are exempt from these changes:
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.
If you decide to transfer the funds and open an inherited IRA, make sure you have:
Be sure to consult a financial professional to use an inherited IRA in way that works best for your situation.
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