Inherit an IRA? You Need to Know This in 2022
Inheriting an Individual retirement account (IRA) can be a significant financial event, offering both opportunities for growth and challenges in managing the tax implications. If you’ve found yourself in the situation of inheriting an IRA in 2022, understanding the rules and regulations surrounding it is crucial. Here’s what you need to know.
Types of IRAs
Before diving into the specifics of inherited IRAs, it’s essential to understand the different types of IRAs:
- Traditional IRA: Funded with pre-tax dollars, taxes are due upon withdrawal.
- Roth IRA: Funded with after-tax dollars, allowing for tax-free withdrawals in retirement.
- Inherited IRA: This is the account you receive when you inherit an IRA from someone else, and it comes with its own set of rules.
Who Can Inherit an IRA?
Typically, IRAs can be inherited by spouses, children, grandchildren, or other designated beneficiaries. The rules for each beneficiary category differ significantly.
Spousal Beneficiaries
As a spouse inheriting an IRA, you have unique options:
- Treat as Your Own: You can choose to treat the inherited IRA as your own, allowing you to continue contributing to it and defer taxes until withdrawals are made.
- Transfer to Beneficiary IRA: You can transfer the inherited IRA into a new account in your name, deferring taxes and maintaining control.
- Withdrawals: You can take required minimum distributions (RMDs) based on your life expectancy.
Non-Spousal Beneficiaries
For non-spousal beneficiaries, the options differ:
- 10-Year Rule: The SECURE Act of 2019 established a 10-year rule for most non-spousal beneficiaries, requiring the account balance to be fully distributed within ten years following the account owner’s death. There are some exceptions for eligible designated beneficiaries, such as minors, disabled individuals, or those within ten years of the deceased account holder’s age.
- RMDs: As of 2022, non-spousal beneficiaries are no longer required to take RMDs annually (unless they fall under the exceptions mentioned). However, the entire account must be drained by the end of the ten-year period.
Tax Implications
Understanding the tax implications of an inherited IRA is paramount:
- Traditional IRA: Distributions from a traditional inherited IRA are considered taxable income in the year you withdraw them.
- Roth IRA: Distributions from a Roth IRA can be tax-free, provided the account has been open for at least five years.
- Tax Reporting: Be sure to report any distributions on your tax return, as they may impact your overall tax situation.
Planning for the Future
Inheriting an IRA presents an excellent opportunity for financial planning. Here are some strategies to consider:
- Consult a Financial Advisor: Navigating the nuances of inherited IRAs can be complex. A financial advisor can provide personalized guidance based on your situation.
- Consider Your Financial Needs: Determine whether you need to access funds quickly, or if you can let them grow, especially in the case of a Roth IRA.
- Discuss with Family: Communication with family members about the inheritance can help manage expectations and reduce confusion.
Conclusion
Inheriting an IRA is a significant event that can influence your financial landscape. In 2022, understanding the rules—whether you are a spouse or a non-spouse—can help you make informed decisions about withdrawals, taxes, and long-term financial planning. Always consider seeking professional advice to ensure that you are making the best decisions for your financial future.
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UPDATE: The IRS later updated that inherited RMDs (per the 10 year rule) were not required in 2022 but will be required in 2023 and beyond…
This is ridiculous. Can they make our freaking taxes any more complicated? Who manages the inherited IRAs, the place it comes from, your accountant, how are individuals supposed to know all this?
Great video. I recently inherited a traditional IRA this year (2023) I was under the impression that one doesn’t have to take a distribution for that same year. The RMD’s kick in the following year (2024) is that true? Thanks!
What gives them the right to dictate when and how you spend your own money ?
Trump 2024
If i inherited a 401k before 2020 and haven't been taking distributions from it,and not sure if any had been taken prior to this issue. Am i making a big mistake by not doing so? I also would like some advice on other matters pertaining to my tax status with the IRS, and whether it would be a good idea to request a personal tax audit, so that I may resolve (if any?) Issues that may present themselves in this most difficult time in my life ? Sincerely seeking closure. Thankfully. RAO
Why wouldn't I instruct my heirs to do a roth conversion and pay the taxes out of the IRA balance? It would reduce their inheritance but have very limited effect on their taxes.
I’ve watched at least a dozen videos related by to inherited IRA’s and this is the FIRST video that actually shows how to calculate RMD’s. THANK YOU! You have a new subscriber
You are saying there are no RMD's on an Inherited ROTH IRA but was wondering if things have changed since you posted this? What I have been finding is that Inherited ROTH IRA's so require a RMD.
How do I know if the deceased took the RMD or not?
Are you certain RMDs are not required for a Roth IRA inherited from a parent as a designated beneficiary?
I did read about the IRS statement in Feb 2022 that RMDs are required as of 2023 for inherited IRAs following the 10 year rule.
On the IRS website it seems to indicate that RMDs are required for BOTH inherited traditional and inherited Roth IRAs.
Thank you so much for your help.
Holy crap! I skipped this note in September. We studied and 'knew' all the RULES after a beneficiary IRA inheritance from a death in 2020. The IRS will puke a lot of goodwill if the agency comes after RMDs and tax penalties for 2021 — when they put out a rule in 2022. Let's hope sober heads prevail. Thanks Eric!!
Under final IRS regulations, penalties and RMD's won't kick in until 2023, at least for non-eligible designated beneficiaries and where the IRA owner died in 2020. I just went through this discussion with Fidelity. The key point I discovered was that even if you didn't take the RMDs for 2021 and 2021 (most people didn't), the IRS did not extend the 10 year rule to start as of 2023, rather it still starts in the year following the death. Therefore, if someone passed away in 2020 and you take your first RMD in 2023, the remainder of the IRA still has to be withdrawn by Dec 31, 2031. Also, there is no "catch-up" RMD to make up for the RMD's you did not take in 2021 and 2022, hence why the IRS kept the original 10 year window and did not extend it. For the nitty gritty see: On October 7th, 2022, the IRS released Notice 2022-53 announcing final regulations will be forthcoming and will apply (at earliest) to the 2023 distribution year. https://www.irs.gov/forms-pubs/guidance-for-certain-required-minimum-distributions-rmds-for-the-2021-and-2022-tax-years
I've been adding to my Roth Ira both through conversions and contributions for years now. I still have a traditional Ira as well as a SEP. I'm still working but semi retired and have not started taking Social Security yet. My full retirement age will come in December of 2023. I intend to at least wait until then or possibly put off collecting until later, maybe age 70. At what point does it make sense to stop making conversions and contributing to my Roth Ira? The value of my Roth has surpassed the value of my traditional Ira and SEP in the last year. It's not a huge difference and eventually I expect what's left to go to my daughters or their children. Thanks in advance for any input that you might have. FYI, I'm not making very much income these days, just trying to offset living expenses here in NY at 65. I own my house with no mortgage and would have to guess that the current value of all Ira's along with some taxable accounts work out to about 15-16 times my annual need for income. That's using the current value including the market decline. I have about a 60-40 balance of stock to bonds with some REIT index funds.
My mom passed away im 24. Getting some iras trying to figure out what to do
thank u
In the video if you inherited an IRA in 2020 did you take an RMD an annual RMD in 2021? What if you didn't? I know you said to wait for guidance from whom? I know it's the IRS but who gets the information? CPA's, estate planning attorneys? Why does this information seem so secretive? Congress eliminated the stretch IRA for non spouse beneficiaries so most assumed everything needed to be withdrawn by 10th year with no RMDs. If Ed Slott and others don't know what to do how does the average citizen? So my question is when will information be disseminated and who can be contacted? Thank you.
So glad I watched this. Thank you.
Inherited IRA from someone who died in 2019, therefore following stretch rules. Problem is that the additional ordinary income is causing 85% of Social Security to be taxed too. What can be done to reduce taxes as I believed taxes will rise going forward? I have my own IRA that now requires a RMD. Are Roth conversions on my IRA my only option?
What about for spouses? Same rules?
Wouldnt using a RMD calculator from a major brokerage company give you the correct amount once you enter the variables?
Other than the footnote in one of the slides at the beginning, I don’t recall you mentioning that these rules apply to non-spouse beneficiaries and spouse beneficiaries have their own set of rules. Sorry if I overlooked it. They’ve made it so complicated that we almost need a flowchart to figure which rules to apply, based on our set of circumstances. As a non-spouse beneficiary who inherited an IRA prior to 2020, my understanding is the only change for me is that I will need to use the new revised IRS table to find the new factor to use as my beginning divisor and subtracting 1 from it for each subsequent year thereafter.
Based on your example, there would be a big RMD in the tenth year since the first nine RMDs were based on the recipient's age. To avoid a big tax hit in the tenth year wouldn't it be better to take roughly equal withdrawls each year? That would be 1/10th of the balance the first year, 1/9th the second year, 1/8th the third year, etc.
Would it be advisable for someone with a $200K IRA, who is 80+ years old, and knows they are going to pass away soon (cancer, for example), to withdraw all funds from the IRA, and deposit the money into their family Trust so that their sons can inherit the money tax free, instead of having them deal with the tax laws of inherited IRA’s? Especially if one son lives overseas and hasn’t files US taxes in decades?
They need to hurry up and finalize the rules. What happens if someone inherits an INHERENTED IRA????
So if I inherited ira and was taking RMD (deceased owner died before 2020 at 75) nothing really changes.
What has changed for beneficiaries of someone who died previous to 2020? I am 73, taking RMDs from my deceased partner’s IRA and ROTH.
If you inherit the IRA from a spouse, and roll it over into your own IRA, does this 10 year rule still apply?
Does the new rmd rule apply to 401K