Understanding Inherited IRA Rules

If you have inherited an IRA, tread gently because you are about to enter a minefield. The IRS is your guide and your potential executioner if you do not play by the rules. Regardless of whether you are planning to include an IRA as part of your bequeath or you receive one, learn everything you can about the Inherited IRA before you make a mistake you might not be able to correct. Find a tax professional that specializes in this area of tax law before you do anything.

Spousal Beneficiaries

If you are the spouse of the deceased, the process is relatively simple. You can incorporate the inherited account into your own and wait to distribute the funds when you are required to take the Required Minimum Distribution (RMD). It might be beneficial to wait until you are 59 ½ to rollover the IRA, but you do not have to withdraw funds until your spouse would have reached the age of 70 ½. If you prefer to withdraw funds before you reach 59 ½, you can open an Inherited IRA.

Non-Spousal Beneficiaries

The procedure for transferring an inherited traditional, rollover, SEP, SIMPLE, or Roth IRA is more complicated when the beneficiary is not a spouse. If you are leaving an IRA in your estate, make sure to designate a beneficiary or beneficiaries as well as alternates, or the recipients’ options will be limited. If you name the estate as the beneficiary, it will limit the way the funds are distributed. The IRS has rules regarding inherited IRA required minimum distributions. The type of IRA, the age of the deceased, and the type of Inherited IRA are factors, and there is no 60-day rollover option.

An Inherited IRA can be created and the assets tax-deferred until IRS rules require they be taken out unless a lump sum distribution is preferred. IRAs of the same type and inherited from the same individual can be included in a single Inherited IRA, and a single IRA can be used to create more than one Inherited IRA if there is more than one recipient. No additional funds can be added. If beneficiaries are named, options are more flexible. The 10 percent penalty can be avoided by making sure that the IRA custodian or trustee identifies Inherited IRA distributions as “death distributions” on the IRS Form 1099-R.

Learn Before Acting on an Inherited IRA

Everyone involved has a lot to learn about inherited IRA options. If you are planning to leave an IRA as part of your estate, consult a tax professional. Then you can be certain your intentions will be understood, and you won’t find your decimated by unnecessary Inherited IRA taxes. If you inherit an IRA, whatever you do, do not take any action until you have reviewed the current laws with a tax professional, or you might regret it for the rest of your life.