Inherited IRA? Don’t Panic! Distribution Rules Explained Simply

Losing a loved one is a difficult time, and dealing with their finances can feel overwhelming. If you’ve inherited an IRA (Individual retirement account), you might be feeling lost in a sea of acronyms and regulations. Don’t worry, we’re here to break down the distribution rules in a simple, easy-to-understand way.

What is an Inherited IRA?

An Inherited IRA is an IRA that you inherit from someone else. Think of it as a special account specifically for inherited funds. It’s not like a regular IRA that you contribute to yourself. You can’t add money to it, and you can only take money out according to specific rules.

Who are the Players?

• The Deceased (IRA Owner): The person who originally owned the IRA.
• The Beneficiary: That’s you! The person who inherits the IRA.
• Custodian: The financial institution (like a bank or brokerage) holding the IRA funds.

The Big Question: How Do I Take the Money Out?

The rules for taking distributions from an inherited IRA depend primarily on two things:

1. When the IRA owner died: Did they die before or after their Required Beginning Date (RBD)? The RBD is generally April 1st of the year following the year they turn 73 (previously 70 1/2, then 72 depending on the year).
2. Your relationship to the deceased: Are you a spouse, child, or someone else?

Here’s a simplified breakdown of the most common scenarios:

1. The IRA Owner Died After Their Required Beginning Date (RBD):

• Required Minimum Distributions (RMDs): You, as the beneficiary, will need to take annual RMDs based on your life expectancy. The custodian will usually calculate the RMD amount for you. This can get complicated, so it’s best to consult with a financial advisor.

2. The IRA Owner Died Before Their Required Beginning Date (RBD):

This is where things get a bit more nuanced, but here’s the main idea:

• The 10-Year Rule (The Default): Most beneficiaries fall under this rule. It means you have 10 years from the date of the IRA owner’s death to completely empty the inherited IRA. You can take distributions whenever you want during those 10 years, as long as the account is completely depleted by the end of the 10th year. There are no required annual distributions.

• Exceptions to the 10-Year Rule: The “Eligible Designated Beneficiary” (EDB):

  • Certain beneficiaries qualify for exceptions that allow them to stretch the distributions over their life expectancy. These are called “Eligible Designated Beneficiaries” and generally include:
    • Surviving Spouse: The spouse can either treat the IRA as their own (rollover), or keep it as an inherited IRA and take distributions based on their own life expectancy.
    • Minor Child: The child can take distributions based on their life expectancy until they reach the age of majority (usually 18 or 21), at which point the 10-year rule kicks in.
    • Disabled Individual: As defined by the IRS.
    • Chronically Ill Individual: As defined by the IRS.
    • Individuals Not More Than 10 Years Younger Than the Deceased: This provides a benefit for some older beneficiaries.

Important Considerations:

• “Stretch” IRA is Largely Gone: The “stretch” IRA, which allowed beneficiaries to take distributions based on their life expectancy, is mostly a thing of the past thanks to the SECURE Act. The 10-year rule is now the default for many.
• Taxes: Distributions from a traditional Inherited IRA are generally taxed as ordinary income. Distributions from a Roth Inherited IRA are typically tax-free, assuming the original Roth IRA was held for at least five years.
• Separate Accounts: It’s crucial to set up a separate “Inherited IRA” account at the financial institution. You can’t simply put the inherited funds into your own existing IRA.
• Don’t Delay! Failing to take required distributions can result in hefty penalties from the IRS.
• Seek Professional Advice: Inherited IRA rules can be complex and confusing. It’s always best to consult with a qualified financial advisor or tax professional who can help you navigate the rules and make the best decisions for your individual circumstances.

In Conclusion:

Inheriting an IRA comes with responsibilities and rules. While this article provides a general overview, it’s not a substitute for professional advice. Understanding the basics, however, can help you avoid costly mistakes and make informed decisions about your inherited funds. Remember to act promptly, consult with experts, and carefully consider your options.

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA