As soon as you acquire an IRA, your first priority should be assessing its status. Your inheritance assets must be distributed within 10 years or they will incur penalties.
Non-spouse beneficiaries have several distribution methods available to them when selecting an IRA distribution, including the 10-year rule and life expectancy method.
Life expectancy method
Depending on who has given you their Traditional IRA account, when taking distributions there are various methods available to you when inheriting one from someone other than your spouse. Options could include using either the 10-year method, life expectancy method or lump sum distributions – however be mindful of any penalties for failing to take RMDs by December 31st after original account owner has died.
The life expectancy method is the most tax-efficient option for inheriting IRAs, enabling you to spread out annual RMD amounts evenly over your lifespan, which makes sense if your tax bracket is currently lower than it will be in 10 years.
The Life Expectancy Method is limited to designated beneficiaries, eligible non-designated beneficiaries (EDBs), and successor beneficiaries. EDBs who are single can use it if they’re over 70 1/2 and low income; however it cannot be used by children under 18. Additionally, distribution must take place within five years from when their account owner passes away.
10-year method
Prior to withdrawing any assets from an inherited Roth IRA, it’s crucial that you carefully review its paperwork. You will likely need to determine whether you want to roll them over into an existing account in your name or open one as new – as well as establish distribution rules based on age and status of original account status. It would be advisable to seek professional advice.
The old rules that permitted beneficiaries to stagger withdrawals over decades no longer apply. Now, beneficiaries must empty their inherited accounts within 10 years or pay income taxes on any earnings generated.
However, there are exceptions to this rule. Minor children can continue taking annual RMDs based on their life expectancy until reaching “age of majority,” usually around age 18. Beneficiaries with spouses as beneficiaries can use the IRS Single Life Expectancy table value of their current age to calculate future RMDs.
Rollover method
Survivor spouses receiving distributions from an inherited IRA have an option within 60 days to roll it over into their own IRA, thus deferring RMDs until age 73. Spouses who opt to do this must recalculate their life expectancies each year using the IRS Uniform Life Expectancy Table according to their current age.
Non-spouse beneficiaries have different distribution options depending on their relationship to the deceased account owner and other considerations. Those inheriting a Roth account have several withdrawal strategies available to them, though all must be exhausted by Dec 31 of the 10th year post death if not all gains will be taxed as ordinary income. When inheriting traditional IRAs instead, non-spouse beneficiaries may want to extend withdrawals over a longer period in order to lower their annual tax burden.
Taxes
Many factors influence the rules surrounding inheriting an IRA account, including death date of its original owner and relationship between beneficiaries and non-spouse IRA owners (deceased or otherwise). Beneficiaries should create a written plan outlining their inheritance’s use; this will prevent short-term decisions that don’t align with long-term goals and enable them to make wise investments that align with long-term ambitions.
For example, if an account owner died after Dec. 31 2019, their beneficiary must adhere to a required minimum distribution (RMD) schedule that takes into account his or her life expectancy – meaning their account should be depleted within 10 years. However, if their beneficiary is minor child then RMDs can be calculated using an RMD schedule that takes into account both parties’ lives up until that child reaches age of majority in his or her state – potentially leading to lower withdrawals each year.
