What Can You Do with an Inherited IRA?

Inheriting an Individual retirement account (IRA) can be a significant financial event, opening the door to additional funds for retirement, education, or other life goals. However, managing an inherited IRA comes with specific rules and options that beneficiaries need to understand. This article details what you can do with an inherited IRA, allowing you to make informed decisions about your newfound asset.

Understanding Inherited IRAs

An inherited IRA is an account that you receive when the original account holder passes away. There are two primary types of IRAs: traditional IRAs and Roth IRAs, each with unique tax implications. The handling of an inherited IRA may also vary depending on your relationship to the deceased (spouse vs. non-spouse).

Options for Managing an Inherited IRA

Here are the key options available for beneficiaries of an inherited IRA:

1. Retitle the IRA (For Spousal Beneficiaries Only)

   • If you are the spouse of the deceased, you have the option to retitle the inherited IRA as your own. This gives you more flexibility in managing the account and allows you to roll over the funds into your own retirement account. By doing so, you may also avoid required minimum distributions (RMDs) until you reach the age of 73, depending on your birth date.

2. Open an Inherited IRA

   • Non-spouse beneficiaries cannot retitle the IRA but can open a new inherited IRA. This account will hold the assets from the deceased’s IRA and must be titled with the deceased’s name and indicate that you are the beneficiary.

3. Withdraw the Funds

   • You can choose to withdraw the entire amount from the inherited IRA. However, for traditional IRAs, the distribution will be subject to income tax, while withdrawals from a Roth IRA will generally be tax-free if the account has been open for at least five years.

4. Take Required Minimum Distributions (RMDs)

   • As a non-spouse beneficiary, you will be required to take RMDs from the inherited IRA. The SECURE Act of 2019 changed the RMD rules for inherited IRAs, necessitating that most non-spouse beneficiaries deplete the account within ten years of the original account holder’s death. This means while you can take distributions at any time during this period, the entire balance must be withdrawn by the end of the ten years.
5. Stretch IRA Option (For Eligible Beneficiaries)
   • Certain eligible designated beneficiaries—such as minors, disabled individuals, or those not more than ten years younger than the deceased—may still use the “stretch IRA” strategy, allowing them to take RMDs over their lifetime rather than the ten-year rule.

Tax Implications

The tax implications can vary significantly depending on whether the inherited IRA is a traditional or Roth IRA. Traditional IRAs involve taxable distributions, while Roth IRAs offer tax-free distributions if certain conditions are met. It’s crucial to work with a tax advisor or financial planner to strategize the most beneficial withdrawal method for your unique situation.

Conclusion

Inheriting an IRA can provide significant financial benefits, but it’s essential to understand what options are available and the associated rules and tax implications. Whether you roll the account into your name, open an inherited IRA, or opt for specific withdrawals, the decisions you make can have long-standing effects on your financial future. Always consider collaborating with a financial advisor to navigate the complexities and ensure your actions align with your overall financial goals.

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