- If mandatory minimum distributions from an inherited IRA must be taken, widows and widowers can calculate them using their own life expectancies.
- Spousal beneficiaries can likewise use a five-year plan to empty an inherited IRA.
Does surviving spouse have to take RMD from inherited IRA?
Spousal beneficiaries can also choose to roll over all or part of their inherited IRA funds into an existing individual retirement account. If the inherited income is not a necessary minimum distribution, spouses have 60 days from the date of receipt to roll it over into their own IRA. The spouse does not have to take a mandated minimum distribution until they reach the age of 72 if the funds are combined.
If the departed spouse was older than the spousal beneficiary, becoming the owner of the IRA assets can be a beneficial option because it delays the RMDs. If the IRA was a Roth and you were the spouse, you could handle it as if it had always been your own Roth, and you wouldn’t have to pay RMDs during your lifetime.
This is not, however, an all-or-nothing option. You can split the account and roll some of it over to your own IRA while leaving the rest in the account you inherited, but you won’t be able to change your mind. If you make a rollover and require money before you reach age 591/2, you’ll have to pay a 10% penalty (unless some penalty exception other than death applies).
How do I transfer an IRA to a surviving spouse?
Open a traditional IRA account with a financial institution of your choice if you don’t already have one. Complete the financial institution’s documentation and choose a direct transfer to a regular IRA in the name of the surviving spouse. Make a backup copy for your files.
When a traditional IRA is inherited from a spouse the surviving spouse has three choices?
You have three options if you inherit a traditional IRA from your spouse: Making a withdrawal from the account. It’s being transferred to your account. Being a recipient.
What happens to an inherited IRA when the owner dies?
It is always possible for a beneficiary to take more than the RMD. However, taking more than the minimum required in the beneficiary’s prime earning years when they were in a high tax bracket would not make sense from a tax-planning standpoint. “This might result in a significant increase in their overall taxable income—pushing them into the highest tax brackets,” says Bruce Primeau, CPA, owner of Summit Wealth Advocates in Prior Lake, Minn.
If an original beneficiary died before the inherited IRA was completely depleted, a successor beneficiary could “step into the shoes” of the original beneficiary. They could continue to take the RMD each year based on the continuing life expectancy of the original beneficiary. The “stretch” could be extended for generations using this strategy.
Primeau points out that under previous rules, the individual inheriting the IRA had to start taking required minimum withdrawals by December 31 of the year following the original owner’s death.
What is the 10-year distribution rule for inherited IRA?
The method of distribution will be determined by the date of death of the original IRA owner and the type of beneficiary. If the IRA owner’s RMD obligation was not met in the year of his or her death, you must take an RMD for that year.
For an inherited IRA from a decedent who died after December 31, 2019, the following rules apply:
In most cases, a designated beneficiary must liquidate the account by the end of the tenth year after the IRA owner’s death (this is known as the 10-year rule). During the 10-year period, the beneficiary is free to take any amount of money at any time. There are some exclusions for certain qualifying designated beneficiaries, who are described by the IRS as:
*A minor kid becomes subject to the 10-year rule once they attain the age of majority.
An eligible designated beneficiary can choose between the 10-year rule and the lifetime distribution rules that were in force prior to 2020 and are detailed in the section below titled “For an inherited IRA received from a decedent who died before January 1, 2020.”
Vanguard’s RMD Service does not support accounts that are being distributed based on the 10-year rule. If you’ve chosen to use the 10-year rule for your inherited account or are required to do so, you should consult your tax advisor if you have any questions about how to take distributions under this rule. If the account owner died before he or she was required to begin taking RMDs, a non-designated beneficiary (e.g., an estate or charity) would normally be subject to the 5-year rule (April 1st of the year following the year in which the owner reached RMD age). The non-designated beneficiary would be subject to an RMD based on the original IRA owner’s life expectancy factor if the IRA owner died on or after April 1st of the year following the year in which the owner achieved RMD age. Certain forms of trusts are subject to certain requirements.
For an inherited IRA from a decedent who died before January 1, 2020, the following rules apply:
When a beneficiary inherits an IRA from an account owner who died before the account owner was required to begin taking RMDs (April 1st of the year following the owner’s RMD age), the recipient has two options for distribution: over his or her lifetime or within five years (the “five-year rule”).
The major beneficiary is the spouse. If the owner’s spouse chooses to be a beneficiary of the IRA rather than assume the account, he or she can decide when to start taking RMDs based on his or her own life expectancy. By the later of December 31 of the year after the owner’s death or December 31 of the year the owner would have attained RMD age, the spouse must begin taking RMDs. The spouse beneficiary should wait until the year before he or she plans to start taking RMDs to enroll in our RMD Service. If the owner’s spouse decides to inherit the IRA, he or she must begin taking RMDs by December 31 of the year following the owner’s death or April 1 of the year after the spouse’s RMD age.
When a non-spouse is the major beneficiary, and when the spouse is not the sole beneficiary. By December 31 of the year following the owner’s death, an individual non-spouse beneficiary must begin taking RMDs based on his or her own life expectancy. If all of the beneficiaries have created separate accounts by December 31 of the year after the owner’s death and started in that year, they can take RMDs based on their respective life expectancies. If all numerous beneficiaries have not opened separate accounts by December 31, all beneficiaries must begin taking RMDs in the year after the owner’s death, based on the oldest beneficiary’s life expectancy.
Any individual recipient has the option of distributing the inherited IRA assets over the next five years after the owner passes away. The distribution must be completed by the end of the year in which the owner’s death occurs for the fifth time. If the owner died before taking RMDs, any non-individual beneficiary (excluding a qualifying trust) must use the five-year rule.
Vanguard’s RMD Service does not support accounts being allocated in accordance with the five-year rule. If you’ve chosen to apply the five-year rule for your inherited account or are forced to do so, you should see your tax advisor if you have any issues regarding how to take distributions under this rule.
What is a spousal IRA rollover?
- A spousal beneficiary rollover is a transfer of fund assets to the dead account holder’s surviving spouse.
- The funds are either transferred to the surviving spouse’s account or the decedent’s account is renamed to the surviving spouse.
- Surviving spouses who are named beneficiaries have the option of taking a lump-sum payout or declining the benefits entirely.
Can an inherited IRA be transferred to another person?
If you already have an IRA, you can transfer the inherited funds to another traditional IRA or convert them to a Roth IRA. A direct trustee-to-trustee transfer from one account to another, or between one IRA custodian and another, is the simplest way to do so.
What is the difference between an inherited IRA and a beneficiary IRA?
An inherited IRA is one that you leave to someone after you pass away. The account must then be taken over by the beneficiary. The spouse of the deceased person is usually the beneficiary of an IRA, but this isn’t always the case. Although the inherited IRA laws for spouses and non-spouses are different, you can set up your IRA to go to a kid, parent, or other loved one. You can even direct your IRA to an estate, trust, or a beloved charity.
You have three options with your inherited IRA if you’re the surviving spouse. Rather than making it your own, you can simply identify yourself as the account owner, roll it over into another sort of retirement plan, or treat yourself as the beneficiary. You don’t have the choice to make the IRA your own if you’re a non-spouse inheriting the IRA. Either make a trustee-to-trustee transfer or withdraw the account. You’ll almost certainly have to withdraw the funds within five years of the original account owner’s death.
Spouses get the most leeway
If a survivor inherits an IRA from their deceased spouse, they have numerous options for how to spend it:
- Roll the IRA over into another account, such as another IRA or a qualified employment plan, such as a 403(b) plan, as if it were your own.
Depending on your age, you may be compelled to take required minimum distributions if you are the lone beneficiary and regard the IRA as your own. However, in certain instances, you may be able to avoid making a withdrawal.
“When it comes to IRAs inherited from a spouse, Frank St. Onge, an enrolled agent with Total Financial Planning, LLC in the Detroit region, says, “If you were not interested in pulling money out at this time, you could let that money continue to grow in the IRA until you reach age 72.”
Furthermore, couples “are permitted to roll their IRA into a personal account. That brings everything back to normal. They can now choose their own successor beneficiary and manage the IRA as if it were their own, according to Carol Tully, CPA, principal at Wolf & Co. in Boston.
The IRS has more information on your options, including what you can do with a Roth IRA, which has different regulations than ordinary IRAs.
Choose when to take your money
If you’ve inherited an IRA, you’ll need to move quickly to prevent violating IRS regulations. You can roll over the inherited IRA into your own account if you’re the surviving spouse, but no one else will be able to do so. You’ll also have several more alternatives for receiving the funds.
If you’re the spouse of the original IRA owner, chronically ill or disabled, a minor kid, or not fewer than 10 years younger than the original owner, you have more alternatives as an inheritor. If you don’t fit into one of these groups, you must follow a different set of guidelines.
- The “stretch option,” which keeps the funds in the IRA for as long as feasible, allows you to take distributions over your life expectancy.
- You must liquidate the account within five years of the original owner’s death if you do not do so.
The stretch IRA is a tax-advantaged version of the pot of gold at the end of the rainbow. The opportunity to shield cash from taxation while they potentially increase for decades is hidden beneath layers of rules and red tape.
As part of the five-year rule, the beneficiary is compelled to take money out of the IRA over time in the second choice. Unless the IRA is a Roth, in which case taxes were paid before money was put into the account, this can add up to a colossal income tax burden for large IRAs.
Prior to 2020, these inherited IRA options were available to everyone. With the passage of the SECURE Act in late 2019, persons who are not in the first category (spouses and others) will be required to remove the whole balance of their IRA in 10 years and liquidate the account. Annual statutory minimum distributions apply to withdrawals.
When deciding how to take withdrawals, keep in mind the legal obligations while weighing the tax implications of withdrawals against the benefits of letting the money grow over time.
More information on mandatory minimum distributions can be found on the IRS website.
Be aware of year-of-death required distributions
Another challenge for conventional IRA recipients is determining if the benefactor took his or her required minimum distribution (RMD) in the year of death. If the original account owner hasn’t done so, the beneficiary is responsible for ensuring that the minimum is satisfied.
“Let’s imagine your father passes away on January 24 and leaves you his IRA. He probably hadn’t gotten around to distributing his money yet. If the original owner did not take it out, the recipient is responsible for doing so. If you don’t know about it or fail to do it, Choate warns you’ll face a penalty of 50% of the money not dispersed.
Not unexpectedly, if someone dies late in the year, this can be an issue. The deadline for taking the RMD for that year is the last day of the calendar year.
“If your father dies on Christmas Day and hasn’t taken out the distribution, you might not even realize you own the account until it’s too late to take out the distribution for that year,” she explains.
There is no year-of-death compulsory distribution if the deceased was not yet required to take distributions.
Take the tax break coming to you
Depending on the form of IRA, it may be taxable. You won’t have to pay taxes if you inherit a Roth IRA. With a regular IRA, however, any money you remove is taxed as ordinary income.
Inheritors of an IRA will receive an income tax deduction for the estate taxes paid on the account if the estate is subject to the estate tax. The taxable income produced by the deceased (but not collected by him or her) is referred to as “income derived from the estate of a deceased person.”
“It’s taxable income when you receive a payout from an IRA,” Choate explains. “However, because that person’s estate had to pay a federal estate tax, you can deduct the estate taxes paid on the IRA from your income taxes. You may have $1 million in earnings and a $350,000 deduction to offset that.”
“It doesn’t have to be you who paid the taxes; it simply has to be someone,” she explains.
The estate tax will apply to estates valued more than $12.06 million in 2022, up from $11.70 million in 2020.
Don’t ignore beneficiary forms
An estate plan can be ruined by an ambiguous, incomplete, or absent designated beneficiary form.
“When you inquire who their beneficiary is, they believe they already know. The form, however, hasn’t been completed or isn’t on file with the custodian. “This causes a slew of issues,” Tully explains.
If no chosen beneficiary form is completed and the account is transferred to the estate, the beneficiary will be subject to the five-year rule for account disbursements.
The form’s simplicity can be deceiving. Large sums of money can be directed with just a few bits of information.
Improperly drafted trusts can be bad news
A trust can be named as the principal beneficiary of an IRA. It’s also possible that something terrible will happen. A trust can unknowingly limit the alternatives available to beneficiaries if it is set up wrongly.
According to Tully, if the trust’s terms aren’t correctly crafted, certain custodians won’t be able to look through the trust to establish the qualified beneficiaries, triggering the IRA’s expedited distribution restrictions.
According to Choate, the trust should be drafted by a lawyer “who is familiar with the regulations for leaving IRAs to trusts.”
How long do you have to distribute an inherited IRA?
When a traditional IRA is moved into an inherited IRA, also known as a beneficiary distribution account, the IRS establishes RMD procedures that must be followed. When the original IRA owner died, your options for obtaining distributions from the IRA changed.
- If you died before attaining the age of 701/2, you must begin taking RMDs by December 31 of the year after your death. You can also take advantage of the 5-year rule to distribute your inherited IRA. This allows you to take distributions whenever you want without incurring penalties, as long as all assets in your inherited IRA are completely distributed by December 31 of the fifth year after the IRA owner’s death. Discuss the tax implications of this expedited withdrawal schedule with your tax advisor.
- If you died after attaining the age of 701/2, you can compute your RMDs using either your own age or the original IRA owner’s age in the year of death, whichever is greater. If the original IRA owner was younger than you, this alternative may be advantageous. RMDs for nonspouse inheritors are usually needed to begin the year after the year of death.
- By December 31 of the 10th year after the IRA owner’s death, the SECURE Act compels beneficiaries to take all assets from an inherited IRA or 401(k) plan. Payments to a qualified designated beneficiary (a surviving spouse, the account owner’s minor child, a crippled or chronically ill beneficiary, and a beneficiary who is not more than 10 years younger than the original IRA owner or 401(k) participant) are exempt from the 10-year rule. Beneficiaries can “stretch” payments throughout the course of their lives. Consult your tax advisor about the tax consequences and distribution choices of this expedited withdrawal schedule.
If you’re a nonspouse beneficiary with one or more additional beneficiaries, you’ll need to split your portion of the decedent’s IRA into your own name and then perform your first RMD by December 31 of the year after the original IRA owner’s death. If you miss this deadline, your RMD will be calculated using the life expectancy of the oldest recipient. You’ll need to accept a larger distribution if that person is older than you.
If you inherit a Roth IRA that was funded for at least 5 years prior to the original owner’s death, you can take tax-free distributions. If you’ve inherited a Roth IRA that wasn’t funded for at least 5 years before the former owner died, talk to a tax professional.
What are you going to do with the money? If you don’t need the money right away, leaving the assets in the inherited IRA may be the best long-term decision (again, subject to the RMD rules and other considerations, including changes to your tax bracket). This is because the longer you leave the money in the account, the more tax-deferred or, in the case of an inherited Roth IRA, tax-free growth is possible. When you withdraw money from an inherited IRA, however, it is usually taxed as ordinary income. The more money you take out of an inherited IRA now, the less money you’ll have in the future.
Can I rollover my IRA into my spouse’s IRA?
Individual retirement arrangements provide long-term tax advantages, incentivizing people to save and invest a portion of their earnings for their later years. You can contribute a portion of your taxable income to your spouse’s IRA under the regulations. You can transfer your IRA to your spouse’s IRA, but you must die first. Another option: as part of a divorce settlement, a court might transfer IRA assets from one spouse to the other.
How do I avoid paying taxes on an inherited IRA?
With a so-called Roth IRA conversion, IRA owners can transfer their balance from pre-tax to after-tax, paying taxes on both contributions and earnings. “If they’re in a lower tax bracket than their beneficiaries, it would probably make sense,” Schwartz said.