If you are an eligible designated beneficiary (non-spouse), an IRA can be treated as your own and withdrawals taken over your own life expectancy instead of that of the deceased, keeping funds growing tax-deferred for decades to come.
However, due to complex tax rules related to inherited IRAs, making mistakes could cost you significant penalties and taxes on the inheritance. Before taking any actions on your own, seek advice from a fiduciary financial professional experienced with handling these accounts.
1. Roll Over to a Traditional IRA
Inheriting an IRA can be complex. Experts advise beneficiaries seeking advice from a fiduciary financial professional before taking any actions themselves.
An IRA beneficiary who wishes to keep their funds in an inherited account can do so; however, income taxes will apply on any withdrawals they make. The exact amount will depend on both withdrawal size and beneficiary tax bracket.
Beneficiaries can roll assets over into their own IRA to postpone mandatory RMD distributions until age 70 1/2 and use their life expectancy as the basis for calculating these distributions.
Accounts eligible to meet this rule include traditional, Roth, SEP and SIMPLE IRAs; however, their assets should remain separate when it comes to the 10-year rule; withdrawals can still occur throughout a lifetime period.
2. Roll Over to a Roth IRA
if you are the spouse of the deceased IRA owner, an inherited traditional IRA can be converted to a Roth IRA for you to continue taking advantage of tax-deferred growth; however, withdrawals made will incur income taxes at withdrawal time.
Assume ownership of the account to avoid early withdrawal penalties and allow distributions over your lifetime. Typically reserved for spouse beneficiaries who fulfill specific criteria (i.e. providing primary caregiver duties or being at least 10 years younger).
If you decide to transfer funds directly between trustees or indirectly via rollover (taking a distribution and depositing it within 60 days), a tax professional can help determine how much in taxes will be due from this.
3. Roll Over to a SEP IRA
If you inherit an SEP IRA, its funds can be converted to a traditional IRA through either direct trustee-to-trustee transfers or taking a distribution and depositing it directly into your own IRA within 60 days. Since this can be a complex strategy, it’s wise to consult a fiduciary financial professional in order to comply with all rules that pertain to inheritable IRAs.
Non-spousal beneficiaries looking to roll over an inherited IRA should create their own inherited IRA in their name and open either a traditional or Roth IRA in that account. When considering whether or not to convert, if any taxes will be due on converted amounts (via Form 8606 nondeductible contributions or by reviewing previous tax returns of your spouse). Depending on its size and nature of conversions (convert to Roth or convert from traditional), any penalties may also apply – especially when switching from a traditional to Roth conversion.
4. Roll Over to a SIMPLE IRA
An inherited IRA is an individual retirement account (IRA) you open when inheriting assets from someone who has died, typically from their estate. Most types of traditional, Roth, SIMPLE and SEP IRAs can be transferred over into an inherited IRA for easy rolling over into it.
Alternatively, if you opt for this route, funds must be moved via trustee-to-trustee transfer within 60 days or risk being treated as ordinary income and taxed accordingly at a higher bracket.
The IRS mandates that any inherited IRA be empty within 10 years after its original owner dies unless there are certain exceptions. Spouses or individuals younger than 73 can bypass this obligation by opting for either the five- or 10-year withdrawal method, which allows you to stretch distributions over your lifetime.
