Inherited IRA Rules

 

When you inherit an IRA from someone, you become the beneficiary of that plan. Even if you’re already familiar with all the rules for an IRA you contribute to, the rules for beneficiaries are a bit different. In some cases, you’ll be able to avoid some of the penalties that go along with withdrawals from other IRAs.

Death and the Traditional IRA

Beneficiaries don’t have to worry about the 10% early withdrawal penalty most IRAs have. This applies regardless of the IRA owner’s or beneficiary’s age. However, if the IRA owner would have paid tax, the beneficiary must also. This applies even though the beneficiary inherited the funds.

If you inherit the IRA from your spouse, you have the option to treat the IRA as your own. So, you can defer the IRS required minimum distribution until you reach age 70 1/2. If you’re not a spouse, you might still qualify to get distributions over your lifetime. You’d use the IRS life expectancy tables to figure your required distributions for your life expectancy.

An entire IRA distribution might be subject to the five-year rule if:

  • The IRA owner hadn’t designated a beneficiary.
  • The IRA owner’s executors don’t choose a beneficiary by Sept. 30 of the year after the IRA owner’s death.

Death and the Roth IRA

If you inherit a Roth IRA, the money is usually tax free if it’s a qualified distribution. To be a qualified distribution, the money must have been in the Roth account for five years before it’s withdrawn. These rules also apply:

  • The five-year holding period includes the amount of time the funds were in the account during the deceased’s lifetime
  • If you inherit the Roth from your spouse, you can treat it as your own. So, there are no required withdrawals during your lifetime. However, if you’re not the deceased’s spouse, you’ll need to do one of these, depending on your situation:
    • Take IRS required minimum distributionsfrom the account
    • Use the five-year rule

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