What Is an Inherited IRA?
An inherited IRA, also known as a beneficiary IRA, is an account that is created when someone inherits an individual retirement account. Any person, estate or trust can inherit an IRA, but certain rules and restrictions apply.
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- Published: January 4, 2021
- Updated: August 17, 2022
- 7 min read time
- This page features 8 Cited Research Articles
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Understanding Inherited IRAs
Just like a home, car or real estate, individual retirement accounts can be passed on to beneficiaries after you die.
This holds true for all IRAs, including traditional, Roth, rollover, SIMPLE and SEP IRAs.
Any person, estate or trust can inherit an IRA, but spouses have the greatest flexibility to withdraw and access money from the retirement account.
The Secure Act of 2019 put several new restrictions in place for withdrawing inherited IRA funds and taking required minimum distributions.
Tax rules for an inherited IRA can be complicated. Consider contacting a financial advisor, certified public accountant or lawyer if you need help.
Inherited IRA Distribution Rules
When you inherit an IRA, the distribution rules you must follow and how you can treat the account will vary depending on how and why you inherited the IRA.
One of the most common ways to inherit an IRA is through a spouse. In these circumstances, you have several different options on how to handle the IRA depending on your personal situation.
This includes moving the money into your own separate IRA or treating the inherited account as your own.
The rules do differ for non-spouses who inherit an IRA. If you aren’t a spouse, then you do not have the option to treat the account as your own. You will also have a set amount of time to complete all distributions.
An entity such as a trust can also inherit an IRA and may establish it as an inherited IRA.
Rules for Spouses
If you inherited an IRA from your spouse, you have a few different avenues on what to do with the money. If you’re the sole beneficiary of the IRA, then you can treat the account as your own after you designate yourself as the new account holder. But there are a couple other options as well.
Option 1: Move the Money Into Your Own IRA
You will have the option to roll the IRA into your own existing individual retirement account. You have 60 days to roll an inherited IRA into your own IRA. You can also typically roll it into an employer plan or some annuity plans.
This option may not make sense if you are planning to withdraw any money you inherited and are younger than 59 ½. Since the money is now part of your own IRA, it is treated no differently, and you will be subject to the typical early withdrawal penalties.
Option 2: Move the Money Into An Inherited IRA
You can move the money into an inherited IRA. This keeps the money separate from being folded into and it’s treated the same as other forms of savings you may have, like your own IRA or an employee plan.
If you opt for this route, there is typically no withdrawal penalty. This means you can take money out right away if you need to.
Most non-spouse beneficiaries are required to deplete an inherited IRA within 10 years of the account holder’s death.
This is a new rule established by the Secure Act in December 2019. However, there are four exceptions to the 10-year rule.
Most of these eligible beneficiaries can stretch withdrawals over their life expectancy.
- Minor Children
- The 10-year distribution rule does not begin until the minor child reaches the age of maturity — 18 years old in most states. Minor children must be direct descendants of the account holder to apply for this exception — underage grandchildren don’t count.
- Chronically ill or disabled
- The 10-year rule doesn’t apply. You can stretch IRA distributions over your lifetime. A chronically ill or disabled beneficiary must provide certification by a licensed health care provider proving that he or she meets the 10-year rule exemption under the Secure Act.
- Individuals no more than 10 years younger than the deceased account holder
- This may include siblings, friends or business partners of the deceased. The 10-year rule doesn’t apply, and withdrawals can be stretched over your lifetime.
- Beneficiaries who inherited prior to Jan. 1, 2020
- The 10-year rule doesn’t apply because these beneficiaries are grandfathered under the pre-Secure Act IRA rules. Withdrawals can be stretched over your lifetime.
Unlike a spouse or eligible beneficiary, other beneficiaries cannot treat an inherited IRA as their own and all distributions must be completed within 10 years after the account holder dies.
- Make any additional contributions to the inherited IRA.
- Roll the account into their existing IRA account.
If you are not a spouse or eligible beneficiary, you have two options.
You can transfer your portion of the assets into a new IRA. This account must be set up and formally designated as an inherited IRA.
Or you can withdraw all the money immediately as a single lump sum. To do so, you must open an Inherited IRA in your name first.
If you opt for the lump sum, you won’t face the tax penalty most people incur for withdrawing funds before the age of 59 ½.
However, you would still owe income tax on any withdrawals or RMDs made from pre-tax IRA accounts.
The tax rule is different for Roth IRAs.
As long as the account has been open for at least five years and the beneficiary is over the age of 59 ½, Roth IRA withdrawals can be made without taxation. This applies to both spousal and non-spousal beneficiaries.
Rules for Entities
As the rules for inherited IRAs differ for spouses and non-spouses, there are also differences if the IRA is inherited by an entity. This can include anything from a charity to an estate.
An entity inheriting an IRA is largely like a non-spouse inheriting one. Most of the changes in rules and what can be done with an IRA are based around whether the beneficiary was the spouse of the deceased.
One of the main differences is how quickly the IRA must be distributed. According to Forbes, when an entity like a trust that is not an individual person inherits an IRA, the money typically must be entirely distributed within five years of it being inherited.
There are some workarounds to this rule, such as if the IRA is inherited by a look-through trust. But there is still a set timeline on how long the IRA can take to be distributed which is typically no longer than 10 years.
Inherited IRA Frequently Asked Questions
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8 Cited Research Articles
- Carlson, B. (2020, December 23). Should a Living Trust Be Beneficiary of Your IRA? Retrieved from https://www.forbes.com/sites/bobcarlson/2020/12/23/should-a-living-trust-be-beneficiary-of-your-ira/?sh=7c45c82452ac
- Internal Revenue Service. (2022, September 27). Retirement Topics – Beneficiary. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary
- Bergman, A. (2020, September 21). Inherited An IRA? Here Are Your Options. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2020/09/21/inherited-an-ira-here-are-your-options/?sh=3f97bac4231f
- Barrett, T. (2020, August 3). Who Can Still Do a Stretch IRA after the SECURE Act: Explaining the Exceptions to the Rule. Retrieved from https://www.kiplinger.com/retirement/retirement-plans/iras/601163/who-can-still-do-a-stretch-ira-after-the-secure-act
- Adams, H. (2020, July 23). Inheriting an IRA? Understand Your Options. Retrieved from https://www.schwab.com/resource-center/insights/content/inheriting-ira-understand-your-options
- Slott, E. (2020, February 27). Did the SECURE Act Kill the Stretch IRA? Retrieved from https://www.aarp.org/retirement/planning-for-retirement/info-2020/secure-act-changes-stretch-ira-rules.html
- Internal Revenue Service. (2020, February 20). Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/publications/p590b
- Parthemer, M. R. and Klein, S. (n.d.). The SECURE Act Top Ten. Retrieved from https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2020/may-june/the-secure-act-top-ten/