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.
How long do you have to transfer an inherited IRA?
- When an IRA owner dies, the SECURE Act modified the criteria for dispersing funds from an inherited IRA.
- For non-spousal IRAs, the “stretch IRA” provision has been mostly eliminated. The new rule compels many beneficiaries to take all assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder for IRAs inherited from original owners who died on or after January 1, 2020.
- In some situations, disclaiming inherited IRA assets may make sense because they could boost the total value of your estate and push you over the estate tax exemption limit.
If you’re the son, daughter, brother, sister, or even a close friend of an IRA beneficiary, it’s vital that youand the IRA ownerunderstand the regulations that govern IRA inheritances.
“With the enactment of the SECURE Act in December 2019, some of the procedures for inheriting and distributing assets upon the death of an IRA owner changed,” explains Ken Hevert, senior vice president of retirement products at Fidelity. “If IRA owners and beneficiaries aren’t diligent, they risk paying greater taxes or penalties, as well as losing out on future tax-advantaged growth.”
As a nonspouse beneficiary, here’s what you need to know about inheriting IRA funds. The criteria for inheriting IRA assets vary depending on your relationship with the IRA’s original owner and the sort of IRA you acquired. Whatever your circumstances, speaking with your attorney or tax counselor ahead of time may help you avoid unwanted repercussions.
Nonspouse inherited IRA owners are normally required to begin taking required minimum distributions (RMDs) no later than December 31 of the year after the death of the original account owner, according to the IRS.
With the passing of the SECURE Act, nonspouse IRA distributions must be completed within 10 years of the account owner’s death. You may previously “stretch” your dividends and tax payments out beyond your single life expectancy if you inherited an IRA or 401(k). For some recipients, the SECURE Act repealed the so-called “stretch” provision.
You don’t have the option of rolling the assets into your own IRA as a nonspouse beneficiary. You have numerous alternatives if you inherit IRA funds from someone other than your spouse:
Can I transfer an inherited IRA to another bank?
Because you and your sister are non-spouse beneficiaries, the bank will open inherited IRAs for each of you and deposit the funds immediately into both accounts (the options are different for spouses who are beneficiaries and can roll the money into their own IRAs). You have the option of keeping the IRA with that bank or transferring it to another IRA custodian, such as a brokerage firm or mutual fund company. Money from an inherited IRA must be transferred straight from the old account to the new one, so find out what actions you need to follow from the new administrator. Christine Russell, senior manager of retirement at TD Ameritrade, adds that the new IRA custodian must be willing to accept inherited IRAs. You may also be required to complete additional documents in order to complete the transfer.
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.
Can an inherited IRA be rolled over to another inherited IRA?
Inherited from a previous marriage. If a traditional IRA is left to a surviving spouse, the surviving spouse usually has three options:
- By declaring himself or herself as the account owner, he or she might treat it as his or her own IRA.
- Treat it as if it were his or her own by rolling it over into a standard IRA or, if taxable, into a:
d. A state or local government’s deferred compensation plan (section 457(b) plan), or
3. Rather than considering the IRA as his or her own, regard himself or herself as the recipient.
Even if the surviving spouse is not the sole beneficiary of his or her deceased spouse’s IRA, a distribution from his or her deceased spouse’s IRA can be rolled over into the surviving spouse’s IRA within the 60-day time restriction, as long as the payout is not a mandatory distribution.
Someone other than the spouse inherited it. The beneficiary cannot treat an inherited conventional IRA as his or her own if it is not from a deceased spouse. This means the beneficiary is unable to contribute to the IRA or transfer funds into or out of the inherited IRA. The beneficiary, on the other hand, can make a trustee-to-trustee transfer if the IRA into which the funds are being transferred is established and maintained in the name of the deceased IRA owner for the beneficiary’s benefit.
The recipient, like the original owner, will not owe tax on the IRA’s assets until he or she receives distributions from it.
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 kind 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 apply the 10-year rule for your inherited account or are forced to do so, you should consult your tax advisor if you have any issues regarding 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 the 10-year rule on inherited IRA?
“According to the 10-year rule, IRA beneficiaries who are not receiving life expectancy payments must withdraw the whole balance of the IRA by December 31 of the year after the owner’s death.”
What do you do with an inherited IRA from a parent?
Many people believe that they can roll over an inherited IRA into their own. You cannot roll an IRA into your own IRA or treat it as your own if you inherit one from a parent, aunt, uncle, sibling, or acquaintance. Instead, you’ll have to put your share of the assets into a new IRA that’s been established up and properly labeled as an inherited IRA for example, (name of dead owner) for the benefit of (name of deceased owner) (your name).
If your mother’s IRA account has more than one beneficiary, money can be divided into separate accounts for each. When you split an account, each beneficiary can treat their inherited half as if they were the only one.
An inherited IRA can be set up with almost any bank or brokerage firm. The simplest choice, though, is to open your inherited IRA with the same business that handled your mother’s account.
Most (but not all) IRA beneficiaries must drain an inherited IRA within 10 years of the account owner’s death, thanks to the Secure Act, which was signed into law in December 2019. If the owner died after December 31, 2019, this rule applies to inherited IRAs.
Can you split up an inherited IRA?
There are now basically two sets of rules for inherited IRAs as a result of the SECURE Act, which was passed in late 2019. Which regulations to apply are determined by a) when the original account owner died and b) who is named as the account’s beneficiary.
In addition, the CARES Act, which was passed in March 2020, eliminates the need for IRA withdrawals in 2020, whether inherited or not.
Death in 2020 or Later
We must first assess whether the beneficiary is a “eligible beneficiary” if the IRA owner dies in 2020 or later.
- anybody who is disabled or chronically ill (as defined in IRC 7702B(c)(2)), or anyone who is disabled or chronically ill (as defined in IRC 7702B(c)(2)), or anyone who is crippled or chronically ill
- any specified beneficiary who is at least ten years younger than the account owner.
The previous rules apply if the beneficiary is an eligible beneficiary (see below).
The new rule applies if the beneficiary is not an eligible beneficiary. The new law merely states that the account must be dispersed in its whole within ten years of the original owner’s death. However, the distributions do not have to be uniformly distributed across those ten years. (For example, you could accept no distributions for the first nine years and then distribute everything in year ten.)
Deaths in 2019 or Earlier, As Well as Eligible Beneficiaries
The “old rules” detailed in the rest of this article apply when one of the following conditions exists:
- As mentioned above, the beneficiary is a “eligible beneficiary” who can take advantage of the former (more favorable) regulations.
There are essentially two sets of rules under the “old rules”: one set applies if the dead owner was your spouse, and another set applies to any other named beneficiary. We’ll start with spousal beneficiaries, then non-spouse beneficiaries, and finally instances with many beneficiaries.
Inherited IRA: Spouse Beneficiary
A spousal rollover does not have a deadline. You can own the account as a spousal beneficiary for several years and then choose to conduct a spousal rollover if you want to.
If you execute a spousal rollover, it becomes a regular IRA (i.e., it’s the same as any other IRA you had before), and all of the typical IRA restrictions apply, whether Roth or traditional.
If you keep the account as a spousal beneficiary, the restrictions will be identical to those of a traditional IRA, with a few key exceptions.
First, regardless of your age, you can withdraw distributions from the account without incurring the 10% penalty. If you plan to need the money before you reach the age of 59.5, this is a strong reason to avoid the spousal rollover at least for the time being. (As previously stated, a spousal rollover has no deadline.)
Second, if the inherited account was a Roth IRA, any earnings withdrawals made before the original owner satisfied the 5-year criteria will be taxed (though not the 10 percent penalty).
Third, you must begin taking required minimum distributions (RMDs) in the same year that the account owner would have been obligated to do so. (If the original owner your spouse was obliged to take an RMD in the year in which he or she died but had not done so, you must take it on his or her behalf, calculated as if he or she were still alive.)
Each year, your RMD from the account will be determined using the “Single Life” table in IRS Publication 590-B and your remaining life expectancy.
**
Inherited IRA: Non-Spouse Beneficiary
When you inherit an IRA as a non-spouse beneficiary, it works similarly to a traditional IRA, with three key differences.
Regardless of your age, distributions from the account are not subject to the 10% penalty. (This is the same as if the beneficiary is a spouse.)
If the inherited account was a Roth IRA, any earnings withdrawals made before the original owner completed the 5-year criterion will be subject to income tax, but not the 10% penalty. (The same rules apply to a spouse beneficiary.)
You must take a specified minimum payout from the account each year, commencing the year after the account owner’s death. (If the account owner was obliged to take an RMD in the year of his death but had not done so, you will be compelled to take his RMD on his behalf, computed as if he were still alive.)
The rules for determining your RMD are similar (but not identical) to those for calculating the RMD of a spousal beneficiary. Your first RMD from the account will be determined using the “Single Life” table in IRS Publication 590-B and your remaining life expectancy. In subsequent years, instead of calculating your remaining life expectancy (as a spousal beneficiary would), you simply remove one year from your previous life expectancy. **
Consider this scenario: your father died in 2018 at the age of 65, leaving you his entire IRA. You have no RMD for 2018 (the year of your death). In the year 2019, you will celebrate your 30th birthday. Your remaining life expectancy at age 30 is 53.3 years, according to the Single Life chart. As a result, your 2019 RMD would have been equal to your account balance on December 31, 2018, divided by 53.3.
Your RMD for 2020 would have been equal to the account balance at the end of 2019, divided by 52.3, if the CARES Act had not eliminated RMDs for 2020. (However, the RMD for 2020 would be $0 due to the CARES Act.) The RMD in 2021 will be the balance as of 12/31/2020, divided by 51.3.
Important exception: instead of distributing the account over your remaining life expectancy, you can choose to divide it over 5 years. If you choose to do so, you can collect your distributions in any order you like over the five years for example, none in years 1-3 and everything in year 4.
The new inheriting beneficiary is known as a successor beneficiary if a beneficiary dies before the account is fully dispersed.
If the original account owner died in 2020 or later, and the original beneficiary (i.e., the first person to inherit the IRA) was a “non-eligible” beneficiary, the succeeding beneficiary will have to follow the same distribution schedule as the original beneficiary. That is, the account must be distributed within 10 years following the original owner’s death to the succeeding beneficiary.
If the original account owner died before 2019 and/or the original beneficiary was a “eligible” beneficiary, the successor beneficiary will be required to distribute the account over a 10-year period, but it will begin with the date of the original beneficiary’s death (rather than the date of the original owner’s death).
- Make careful to include both your name and the original owner’s name when renaming the account.
- Do a direct transfer only if you decide to relocate the account to another custodian (from Edward Jones to Vanguard, for example). If you try to do a standard rollover and end up with the cash, it will be treated as if you had distributed the entire account.
Inherited IRA: Multiple Beneficiaries
When multiple beneficiaries inherit an IRA, they are individually classified as non-spouse beneficiaries, and they must calculate RMDs based on the life expectancy of the oldest beneficiary. This is not a good thing because it limits the IRA’s ability to “extend.”
If the beneficiaries divide the IRA into two inherited IRAs by the end of the year following the original owner’s death, each beneficiary can treat his inherited portion as if he were the lone beneficiary of an IRA of that amount. This is advantageous since it implies:
- A spouse beneficiary will be treated as a spouse beneficiary rather than a non-spouse beneficiary, giving them greater distribution possibilities.
- Each non-spouse beneficiary will be able to calculate RMDs based on his or her individual life expectancy.
Note that if the original owner dies in 2020 or later and at least one beneficiary is a “non-eligible beneficiary” (as defined at the start of this article), the entire account must be distributed within 10 years, unless the IRA agreement includes a provision that divides the IRA into separate IRAs for each beneficiary immediately.
- Create a separate account for each beneficiary, with a title that includes both the deceased owner’s and the recipient’s names.
- To transfer assets from the original IRA to each of the inherited IRA accounts, use direct trustee-to-trustee transfers.
A Few Last Words
Before you do anything with an IRA that you have inherited, you must first grasp the applicable rules. Don’t move any money until you’ve figured out what’s going on, as simple administrative errors can be extremely costly.
Also, if you decide to seek advice which I think is a good idea don’t assume that simply because someone is a financial advisor, he or she knows everything there is to know about inherited IRA laws. In this case, I’d recommend looking for someone who has a CPA or CFP qualification.
**If the inherited IRA is a traditional IRA, you are older than the deceased IRA owner, and the deceased IRA owner had reached his “required beginning date” by the time he died, your RMD could be less than the amount calculated above, because you can calculate it using the deceased owner’s remaining life expectancy (from the “Single Life” table) and the owner’s age as of his birthday in the year of death (and reducing by one for each following year)
What is it?
The withdrawal of the whole value of an inherited traditional IRA or employer-sponsored retirement plan account in one tax year is known as a lump-sum distribution. A lump-sum payout is determined by this one-tax-year time frame, not by the amount of distributions. A lump-sum distribution can be made as a single payment or as a series of payments over the course of the tax year. When you inherit a traditional IRA, this distribution option is usually accessible, but it may also be available when you inherit a retirement plan account (if the terms of the plan allow it). If you are not the IRA or plan’s sole beneficiary, the lump-sum distribution choice will apply to your part of the inherited money separately.
You will be subject to federal (and probably state) income tax on a lump-sum payout as an IRA or retirement plan beneficiary for the tax year in which it is received (to the extent that the distribution represents pretax or tax-deductible contributions, and investment earnings). A lump-sum distribution is generally not viewed as the ideal option to disperse cash from an inherited IRA or plan for this and other reasons. Other options for taking post-death payouts will usually offer better tax treatment and other benefits.
How much taxes do you pay on an inherited IRA?
If you are the beneficiary of a stretch IRA, you must take your first required minimum distribution by December 31 of the year after the death of the IRA owner. To determine the needed minimum distribution amount, you’ll need the following information:
- Your age on December 31st of the year following the death of the original IRA owner; and
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.
What are the distribution rules for an inherited IRA 2020?
When you put money into an inherited IRA or Roth IRA, your distribution requirements are determined by a number of circumstances, including the date the original account owner died.
If the account owner died on or before December 31, 2019, you can use the IRS Single Life Expectancy Table to calculate RMDs based on your age.
In most circumstances, if the original account owner died on or after January 1, 2020, you must fully disperse your account within 10 years of the original owner’s death.
However, if you are regarded an eligible designated beneficiary, there are several exceptions. A juvenile child of the original account owner, a disabled or chronically ill individual, or any other person not more than 10 years younger than the deceased account holder are all eligible designated beneficiaries. You can still withdraw RMDs based on your age if you are an eligible designated beneficiary.