Death and taxes. The two are indelibly tied, particularly when it comes to the transfer of wealth. For beneficiaries, a smooth transition of a loved one’s retirement savings to your own requires following the IRS’s strict IRA inheritance rules.
Based on gendered life expectancies and the ubiquitous nature of IRAs for retirement savings, women are more likely to have to deal with the tangle of administrative tasks that come with inheriting an IRA.
Going in, know that there are two things that dictate what happens when you inherit an IRA: Your relationship to the deceased and what kind of IRA they left you.
What’s your relationship to the original account holder?
If you’re a spouse and the sole beneficiary of an IRA, IRA inheritance rules are pretty straightforward. You can take over the account and roll the assets into an existing IRA (as long as it’s the same type of IRA), or set up a new account.
As far as the IRS is concerned, they’ll treat it as if it has been yours all along. That means you can continue to make contributions and withdrawals are based on the IRA rules that apply to you.
If you’re a non-spouse (a child, other relative or no relation) or one of multiple people who inherit an IRA, a little more legwork is required. In this case transfers into existing IRAs aren’t allowed. Each person must set up a new IRA into which they’ll transfer the portion of money they inherited. Also, additional contributions to this account aren’t allowed.
RELATED: How to open an IRA
What type of IRA did you inherit?
The type of IRA — whether it’s a Roth or traditional IRA — will determine how much you’ll have to pay in taxes and also what your withdrawal strategy should be.
Withdrawals from an inherited traditional IRA generally count as income and will be taxed at your tax rate, not the deceased’s. (Consider meeting with a financial pro to figure out the tax impact before you make a large withdrawal.)
If you’re the beneficiary of a Roth IRA, your withdrawals of the original owner’s contributions (not earnings) are completely tax-free. Earnings can be tapped tax-free as well, but tread carefully: The account has to have been opened at least five years before the original owner died (a la the 5-year rule). Less than that, and you’ll owe income tax on those earnings withdrawals.
Lastly, here’s a new wrinkle in IRA inheritance rules…
New IRA inheritance rules give you 10 years to drain the account
It previously required some tricky math to figure out how long beneficiaries could let the money continue to accrue earnings in an inherited IRA and when they were required to start withdrawing money. The SECURE Act, passed last year, changed all that. If the original IRA owner died after Dec. 31, 2019, beneficiaries are required to empty the inherited account within 10 years of the original owner’s death. (If your loved one died before then, see the IRS rules.)
There are exceptions to the 10-year rule. Here they are with a minimum number of words:
- You’re a spouse: Since you get to treat the account like you’re own the regular rules of required minimum distributions apply.
- You’re a minor: You get more time to take distributions until you reach the “age of majority” (18 in most states). At that point the 10-year rules kick in.
- You’re disabled or chronically ill: The IRS allows you to stretch out withdrawals over your lifetime.
- You’re not more than 10 years younger than the original account owner: You’re also allowed to stretch distributions over your lifetime.
More about IRAs and estate planning on HerMoney:
- 6 IRAs Every Woman Needs to Know About
- IRA vs. 401(k): What’s the Difference?
- When Death Happens: Planning for the Unexpected
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