Who Can Inherit An IRA?

When an individual inherits an IRA or an employer-sponsored retirement plan after the original owner dies, an inherited IRA is created. The beneficiary of an Individual Retirement Account (IRA) might be anyone—a spouse, a relative, or an unconnected party or corporation (estate or trust). However, the rules for handling an inherited IRA differ for spouses and non-spouses.

A beneficiary IRA is also known as an inherited IRA. Many of the top IRA brokers can assist you in resolving difficulties such as IRA asset inheritance, taxation, and the continuation of your retirement account status.

The Setting Every Community Up For Retirement Enhancement (SECURE) Act of 2019, which made some important modifications to the regulations—primarily for heirs other than spouses—made the tax laws regarding inherited IRAs considerably more convoluted.

Who can be a beneficiary of an inherited IRA?

Traditional and Roth IRAs, SEP IRAs, and SIMPLE IRAs are all eligible to be converted into inherited IRAs. Importantly, the IRA’s income tax treatment is unchanged from the original account to the inherited IRA. So, in an inherited IRA, accounts formed with pre-tax dollars (as in a traditional IRA) or after-tax dollars (as in a Roth IRA) are treated the same manner.

Unfortunately, this is one of the few simple rules that apply to inherited IRAs.

When you inherit an IRA, you have a lot of options — way too many! – depending on the circumstances:

You have one set of options if you inherited an IRA and are the original owner’s spouse, a minor child, chronically ill or incapacitated, or not more than 10 years younger than the original owner. Anyone else, on the other hand, has a different set of alternatives.
What you can and should do with the IRA is influenced by whether or not the original account owner was obligated to take required minimum distributions.
Should you aim to reduce taxes or maximize the amount of money you get out of the account?

These are just a few of the thorny issues that an inherited IRA can bring up for the recipient, and the SECURE Act of 2019 changed up long-standing traditions, adding to the confusion.

Some experts encourage IRA beneficiaries to wait until they speak with a financial counselor about their alternatives.

“The worst thing you could do is cash out the plan, put it in your account, and then go visit an advisor and say, ‘Now what?'” says Natalie Choate, a lawyer and author of “Life and Death Planning for Retirement Benefits,” a retirement plan guide.

Can I inherit my dad’s IRA?

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.

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 happens when I inherit an inherited IRA?

A succession beneficiary is someone who inherits an IRA from a parent or grandparent. If the primary beneficiary is unavailable, a contingent beneficiary is named to inherit the IRA. The person who inherits the IRA after the original inheritor dies is known as a successor beneficiary.

Does an inherited IRA have to be distributed in 10 years?

The 10-year rule simply states that the inherited retirement account must be dispersed in full by the end of the tenth year after the death year.

What is the five year rule for an 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 new 10-year rule for inherited IRA?

The following are the most relevant aspects of the “10-year” rule as it relates to the SECURE Act and inherited IRAs:

(1) Non-EDBs have ten years to complete their inherited IRA withdrawals; and

(2) During the 10-year period, non-EDBs are not subject to required minimum distributions (RMDs). In other words, they are not obligated to withdraw a certain amount each year during the course of the 10-year period. They can wait until the 10-year time is up and then withdraw the full inherited IRA account in one big sum.

In March 2021, the IRS released Publication 590-B for 2020, which included a section outlining the 10-year inherited IRA withdrawal rule. The IRS intimated in their explanation that RMDs would be required during the 10-year term, which was not the case.

Publication 590-B was recently updated by the IRS to clarify and rectify its position on the 10-year rule. The IRS specifically indicates that no RMDs are due if a non-inherited EDB’s IRA is fully withdrawn by the end of the 10-year anniversary of the original IRA owner’s death.

Harold, who owned a regular IRA, passed away on July 15, 2020. Vivian, Harold’s adult daughter, had been nominated as the sole beneficiary of his typical IRA. Vivian has until December 31, 2030, to withdraw her inherited IRA funds. Vivian has the option – but not the obligation – to withdraw any amount she wants before December 31, 2030.

The IRS further noted that, while EDBs are still eligible for lifetime distributions from their inherited IRAs based on their life expectancy (thus the term “stretch IRA”), they can choose to use the 10-year rule instead. This is only the case if the IRA owner passed away before the required start date. Individuals born before July 1, 1949, must begin on April 1 of the year in which they turn 70.5; those born after June 30, 1949, must begin on April 1 of the year in which they turn 72.

In some cases, an EDB may prefer the flexibility of the 10-year rule to being bound into a rigorous “stretch IRA” RMD plan each year, even if the time extends beyond the 10-year period.

What are the new rules for inherited IRA distributions?

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 you—and the IRA owner—understand 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 an inherited IRA be split between siblings?

Each sort of IRA recipient has their own set of rules. A spouse, a non-spouse, or an institution such as a trust can all be beneficiaries of an IRA. An IRA beneficiary’s spouse may treat the inherited IRA as if it were his or her own. He or she has the option of rolling the funds over or acting as a non-spouse beneficiary.

The following choices are available to a spouse who is the beneficiary of an inherited IRA from an owner who died on or after the statutory beginning minimum distributiondate:

Using a life expectancy table, distribute the IRA’s assets across his or her lifetime.
Distribute the assets according to the owner’s age, starting with the year of death.

When the spouse is the beneficiary of an IRA that was left to him or her by someone who died before the mandatory starting date under the inherited IRA RMD rules, he or she has the following options:

Within five years of the spouse’s death, withdraw the entire sum.
Take distributions according to the life expectancy table, with payments not beginning until the owner reaches age 70 1/2 under the inherited IRA RMD rules.

There are certain disadvantages to withdrawing the entire balance by the end of the fifth year. You will have to pay tax on an inherited IRA at your regular income tax rate if you opt to remove the entire amount in one lump sum. This means that cashing out your spouse’s whole account balance could put you in a higher tax bracket in the year you accept the distribution, resulting in you paying more tax on an inherited IRA.

Under the IRA requirements for beneficiaries, a non-spouse beneficiary of an IRA has a few possibilities.

By Dec. 31 of the year following the death of the original account owner, he or she can cash in the whole IRA value or begin drawing required minimum distributions under the IRA RMD rules for beneficiaries.

Instead, he or she can pay it in within five years of the death.

As an IRA beneficiary, examine all of these possibilities. If adistribution pushes you into a higher tax band, you’ll pay a higher rate of inheritance tax in the year you get it. Taking bigger distributions during years when you expect to be in a lower tax bracket may be the best option.

Finally, a non-spouse IRA beneficiary can establish an inherited IRA account to spread out the dividends. An IRA recipient can set up the inherited IRA account and then take the required minimum payouts based on a life expectancy table.

It’s critical to understand the IRA transfer requirements when splitting an inherited IRA between siblings. The IRA custodian should be able to move the monies to separate IRAs set up by the siblings with themselves as beneficiaries.

If an inherited IRA is split between siblings, it’s vital to avoid receiving distributions straight to avoid paying taxes at the time of distribution. You can request a trustee-to-trustee transfer to your inherited IRA account under the IRA transfer regulations so that the money can grow tax-deferred for a longer length of time.

An IRA can also be a beneficiary of an entity like a trust or an estate. If you represent an entity that has inherited an IRA, the entity will most likely be required to accept distributions from the full IRA within five years. The sole exception is if all of the trust’s beneficiaries are persons. In that situation, the distributions may be spread out according to the oldest beneficiary’s life expectancy table.

Is there a way to avoid paying taxes on an inherited IRA?

After inheriting a retirement account, you have two basic alternatives. Withdraw the entire amount and face a hefty tax charge, or transfer the inherited 401(k) or IRA to a Beneficiary IRA (also known as an Inherited IRA) and delay taxes until withdrawals are made. If you wish to pursue the Inherited IRA route, there are a few rules to follow.

When it comes to cashing out an inherited retirement account, there are no age restrictions. The 10% early withdrawal penalty that would apply if you took money out of your personal retirement account before turning 59 1/2 years old does not apply. You will, however, be responsible for income taxes on the money you withdraw. If you withdraw all of the money from a larger IRA at once rather than over time, you may end up paying significantly more taxes.

Does an inherited IRA count as income?

Individual retirement accounts (IRAs) and inherited IRAs are tax-deferred accounts. When the owner of an IRA account or the beneficiary—in the event of an inherited IRA account—takes distributions, tax is due. IRA distributions are treated as income and are subject to the appropriate taxes. IRA distributions would not be deemed cash on hand if the will mentions “cash on hand” to be dispersed among family members.

“Cash on hand refers to immediately available cash, and since IRA distributions are taxable, I wouldn’t count them in cash on hand,” said Adam Harding, a Scottsdale, Arizona-based financial planner.

The principal beneficiary designation takes precedence over any will directions in the case of inherited IRAs. It is not proper for the executor of the estate to request that the IRA main beneficiary return the IRA to the estate. As the principal beneficiary, you have complete control over your ancestor’s IRA.

You would have to pay taxes if you cashed out the inherited IRA and gave it to the estate. “If you cash in your IRA and give it to her estate, you’ll have to pay taxes on it on top of losing your inheritance,” Arie Korving, a financial counselor of Korving & Company in Suffolk, Virginia, explained.