Inherited IRA rules do apply when you find yourself named a beneficiary and inherit an IRA account from a family member or loved one. This inheritance may be able to be used toward your retirement or toward other areas. But it is important to understand these particular rules and considerations before you do anything with this inherited IRA.
If you do ever find yourself the beneficiary of an inherited IRA, here are several important factors you’ll need to consider.
Inherited IRA Rule #1: Are you the decedent’s spouse? The first consideration is your relationship to the account holder who has passed away. If an inherited IRA comes to you from a spouse, you have a different set of options available compared to an inherited IRA from a non-spouse. For example, a spouse can choose to take ownership of the inherited IRA by having it rolled over into a new or existing account in his or her own name or by having the ownership of the inherited IRA changed into his or her name. When one of these options is selected, all the IRA rules that otherwise apply to the spouse (including the rules on required minimum distributions, if applicable) now apply to the inherited account assets based on that spouse’s age.
Inherited IRA Rule #2: Options for a non-spouse heir: If your inherited IRA is not from a spouse, you are not permitted to roll over the inherited IRA into your own account. Instead, you have two options. You can either take a full distribution of the account, in which case you’ll owe income tax on that distribution (provided that the account was structured as a traditional IRA), and you’ll be unable to keep the account assets growing on a tax-free basis. Alternatively, you can elect to have the account characterized as an “inherited IRA.” You’ll then become subject to the rules on required minimum distributions based on a schedule using your age.
Common questions about inherited IRAs
Do you need to make withdrawals now? If you’re an inheriting spouse and you need to withdraw money from that inherited IRA before you reach age 59½, you also have the option to have the account retitled and be characterized as an “inherited IRA.” This choice allows the heir to begin immediate withdrawals without having to pay the 10% penalty that may otherwise apply.
What’s in the account? The asset types contained within the account may influence any decisions you need to make. Since self-directed IRAs can contain illiquid assets such as real estate and private company debt, you may want to avoid situations where you incur a significant tax bill without having the funds to pay for it.
If you have inherited a self-directed IRA and have questions about the next steps to take after inheriting this IRA, consider consulting with a qualified IRA custodian such as Quest Trust Company.
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