When it comes to retirement planning, Individual Retirement Accounts (IRA) are well known. But an “Inherited IRA” might not be so familiar despite playing an essential part in estate and financial planning. Let’s explore exactly what an “Inherited IRA” entails as well as any rules surrounding its distribution and operation.
Definition An Inherited or Beneficiary IRA, often referred to as an “IRA After Death,” is established when someone inherits an existing individual retirement account after its owner passes away; not by adding new funds but simply through transfers of assets inherited via will or inheritance. The person inheriting such an account is known as its beneficiary.
Types of Beneficiaries
If a spouse inherits an IRA, they have several choices available to them in terms of how they wish to use it:
* Treat it like their own account by designating themselves as the account owner
* Move over into either their own IRA account or another retirement plan
Non-spousal Beneficiaries must open an Inherited IRA when inheriting funds;
Children, friends or trusts have different rules regarding these accounts and must typically open one themselves to access these funds.
Distribution rules from an Inherited IRA can be complex and depend heavily upon both your relationship to the deceased as well as his age at time of death.
If a spouse treats an IRA as their own or rolls it into another account, standard distribution rules apply; but with an Inherited IRA account opened instead they can wait to start taking Required Minimum Distributions until their deceased loved one would have turned 72 before taking RMDs.
Beneficiaries other Than the Spouse:
Prior to the SECURE Act of 2019, non-spousal beneficiaries could “stretch out” distributions from an Inherited IRA over their lives – which allowed tax-deferred growth over an extended period. This proved advantageous.
Under the SECURE Act, most non-spousal beneficiaries must withdraw all assets held within an Inherited IRA within 10 years after its creator has passed. No annual RMDs need to be distributed – rather, all balance must be distributed before that period ends.
Exceptions from this rule are beneficiaries who are less than 10 years younger, disabled, chronically ill or minor children of deceased (though such minor children must begin receiving distribution once they attain majority).
It is essential to be mindful that withdrawals from an Inherited IRA will usually be taxed, though its treatment depends on whether it was Traditional or Roth. Traditional IRA distributions will likely be treated as ordinary income while Roth IRA distributions usually remain tax-free as long as the account has been open for at least five years.
Receiving an inheritance of an IRA may provide an unexpected financial boost, yet comes with important responsibilities and possible tax repercussions. Should you become the beneficiary, it would be prudent to consult a financial advisor or tax professional so as to make informed decisions that meet both your financial goals and current regulations.