of Inherited IRAs
What You Need to Know
You’ve found out that you are inheriting an IRA or retirement account from a loved one who has passed away because they listed you as a specific beneficiary for their retirement account. There are many things that you need to know about inherited IRA’s before you take any action on your inheritance. It can seem confusing, but it can be taken one step at a time and become almost as easy as ABC.
Transfer the IRA to a New
Retirement Account
Transfer the IRA to a new retirement account that will be titled as an inherited IRA for your benefit but will also have your loved one’s name in the account title still. It’s important that you do this step correctly so that your inherited IRA is not transferred into a regular IRA account that you might already have open.
The only time you don’t need to open a new inherited IRA account is if you are inheriting your spouse’s IRA. In this case, you can transfer your spouse’s IRA into your IRA account. It might be useful to consult both your accountant and your financial advisor for the account before you make any transfers.
Was your loved one required to take RMD before they passed away and did they take it already in the year they passed away?
If the answer is yes and no to these questions, you or the executor will need to coordinate to make sure that the RMD is withdrawn from the IRA before the end of the year of passing by either the estate before the IRA is transferred to you or by you after transfer.
RMDs and the Tenth Year Rule
If your loved one was required to take RMD when they passed away, then you will be required to also take RMD over the nine years starting the year after your loved one passed away. The minimum required amount that you have to receive as a distribution each year must be at least the same amount your loved one would have been required to take if they were still alive that year.
This is calculated based on what their age would have been in the year, the value in the IRA at the previous year-end for each calendar year, and the IRS RMD tables based on lifetime expectancies. Note that this is the minimum amount that you are required to withdraw from the IRA. You are always welcome to withdraw more if you would like to. Your financial advisor or your CPA will be able to help you with the RMD calculations.
In the year of the tenth anniversary of your loved one’s passing, you will be required to withdraw any remaining money in the IRA. This will apply whether or not you were required to take RMD in the preceding 9 years.
It really is as easy as ABC. But we are talking about taxes, so there always have to be some complications thrown in. If you are an eligible designated beneficiary, your ABC’s will be different and you might not need to withdraw the entire IRA within 10 years. Eligible designated beneficiaries are the following:
• Surviving spouse
• Someone who is not more than ten years younger than the original IRA owner.
• A child of the IRA owner who has not reached the age of majority (21)
• A disabled or chronically ill person
• Some trusts that themselves have only individuals as eligible beneficiaries of the trust
There are also different rules for how long you have to withdraw your money from the inherited IRA if you are not an individual who was listed as a specific or contingent beneficiary or an eligible designated beneficiary as described above. In these instances, you will most likely have only 5 years to withdraw your money from the inherited IRA.
So while the general rules regarding an inherited IRA are as easy as ABC, you should still consult with your accountant and investment advisor before you do anything with your inherited IRA to make sure that you know all of your options regarding transferring the account and when you have to withdraw the money from your inherited IRA.
