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5 Things You Need to Know About Your Inherited IRA

SG-012-5ThingsYouNeedtoKnowAboutYourInheritedIRAAn Inherited IRA is an account structure that allows a beneficiary to manage an inheritance that was passed down to them through an IRA or 401(k) account.

If you’ve inherited an IRA as a beneficiary, it’s up to you to figure out how to manage and make the most of the account.

You may be wondering when and how can you take a distribution of the assets within the account, your options for rolling over the account and more.

There are many unique IRS rules regarding Inherited IRAs that every beneficiary should know. Some of these rules apply to your distribution options, while others are dependent on your relationship to the benefactor; such as whether you’re a spouse.

Knowing these rules may help you design an informed investment and distribution strategy for the account.

Here are 5 things every Inherited IRA owner needs to know about their account.

1. Inherited IRA Account Structure

When you inherit an IRA, the account maintains the same tax structure and advantages of the original account as it was created by the benefactor.

This could mean the account maintains a post-tax structure, such as a Roth IRA, or a pre-tax structure, such as a Traditional IRA, Solo 401(k) and more.

2. Are You a Spouse or Non-Spouse?

Your relationship to the benefactor makes a difference in how you can manage and take distributions from your Inherited IRA.

If you are the spouse of the original account holder, then your Inherited IRA can be treated like a regular Roth or Traditional IRA, without any unique distribution or contribution rules. You essentially takeover the IRA as your own.

You also have the opportunity if you are a spouse under the normal retirement age of 59 ½ to elect to treat the account as inherited. This would allow you to take distributions from the account without the 10% penalty for early withdrawal.

However, if you’re a “non-spouse,” to the benefactor, then you can’t contribute any money into the Inherited IRA, and there are special distribution rules for the account.

3. Taking Distributions as a Non-Spouse

If you aren’t the spouse of the original account owner, then you have a few distribution options for the assets within the account.

Inherited Roth IRA as a Non-Spouse

  1. For an Inherited Roth IRA, your first distribution option is a 5-year distribution rule, where no yearly required minimum distributions are necessary.
    1. When you take a distribution from an Inherited Roth IRA, then the money within the account was contributed post-tax, and you don’t have to worry about paying taxes on any distributions from the account.
    2. If you choose the 5-year distribution route, you have to make sure the account is emptied by the end of the fifth calendar year following the year of the original IRA owner’s death.
  2. Your second option is to make the balance of the Inherited Roth IRA payable over your life expectancy. These distributions must begin by the calendar year following the year of the original IRA owner’s death.

Inherited Traditional IRA as a Non-Spouse

If you have any other Inherited IRA account type, your distribution options are dependent on the time of death of the original IRA account holder:

  1. If the original IRA account owner passes before the required start date for qualified distributions, which is age 70 1/2, the beneficiary has the same two options above for Roth IRAs – to either follow the 5-year distribution rule, or to make the contents of the IRA payable over the life expectancy of the designated beneficiary.
  2. If the original IRA account owner dies on or after the required beginning date, the required minimum distributions are based on the longer of either the life expectancy of the designated beneficiary, or the original IRA account owner’s life expectancy.
    1. If the first is the longest, distributions must begin by the end of the calendar year following the year of the original IRA owner’s death.

As a non-spouse, you have one full year to decide which distribution strategy works best for you, and to take action on that strategy.

4. Taking Distributions as a Spouse

If you are the spouse of the original account owner, your distribution options for your Inherited IRA differ slightly from the non-spousal options.

Inherited Roth IRA as a Spouse

As the beneficiary of an Inherited Roth IRA, you have 3 distribution options for your account:

  1. You can treat the Inherited IRA as your own by re-titling the account in own name — which is only allowed if you’re the sole beneficiary. Or you can rollover/transfer the funds into your own IRA account.
  2. You can take “lifetime distributions from you Inherited IRA, where you make your distributions payable over the life or life expectancy of the designated beneficiary. (However, you must take distributions by December 31st of whichever comes last: the year your spouse would have attained age 70 ½; or the year after your spouse passed.)
  3. You can use the 5-year distribution rule, like non-spouses can. There are no annual distributions required, as long as the account is emptied by the end of the fifth calendar year after the year of the original account owner’s death

Inherited Traditional IRA as a Spouse

As the beneficiary of an Inherited Traditional IRA, you have 2 distribution options for your account:

  1. Just like option 1 for Inherited Roth IRAs for spouses, you can treat the IRA as your own by re-titling the account in own name if you’re the sole beneficiary or rollover/transfer the funds into your own IRA account.
  2. Or, you can treat yourself as the beneficiary of the account. If the original IRA owner passes before their required beginning date, you have the following options:
    1. Use the 5-year distribution rule; or
    2. The single life expectancy of the designated beneficiary

If the original IRA owner dies on or after their required date for required minimum distributions, the distributions are based on the longer of the two:

  • The single life expectancy of the designated beneficiary, or
  • The original IRA owner’s life expectancy

5. You Can Self-Direct an Inherited IRA

If you’re a spouse to the original account owner of your Inherited IRA, you can self-direct your account using a self-directed IRA account provider.

That means you can give yourself access to a wide variety of investment assets to diversify your retirement portfolio, including real estate, private equity, precious metals and more.

There are many different distribution strategies afforded to both spousal and non-spousal Inherited IRA owners.

Choosing which strategy is best for your account depends on your individual investment goals, and the rules that govern your account type and distribution options.

If you have any questions about your options for your Inherited IRA, feel free to contact us and speak to an expert today >

Safeguard Advisors, LLC is not an investment advisor or provider, and does not recommend any specific investment.

We provide properly structured self-directed retirement plan platforms that provide you as the investor with full control over investment decisions.

The information above is educational in nature, and is not intended to be, nor should it be construed as providing tax, legal or investment advice.

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