Inherited IRA

Leave a Lasting Legacy to Your Loved Ones with an Inherited IRA

Preserve Wealth for Future Generations with an Inherited IRA

While estate planning is often a topic people like to avoid, it is a necessary part of protecting your assets and preserving wealth for future generations. One way to leave a lasting legacy is with an inherited IRA (Individual Retirement Accounts). An inherited IRA is a type of retirement account passed down to the beneficiary after the original account owner dies, such as an IRA or 401k. The assets from the original account holder are transferred into a newly opened IRA in the beneficiary’s name. Being educated on the advantages of inherited IRAs and sharing that knowledge with your beneficiaries can help you preserve wealth and make a smoother transition of assets.

What factors determine a beneficiary's options?

When the original account owner passed away, if the date of death is after 2019 (the SECURE Act and SECURE Act 2.0 made changes to beneficiary options)
The type of beneficiary (spouse, non-spouse, minor child, non-individual) and their relationship to the account owner
Whether the account owner died before or after their required beginning date

If the spouse of an account owner is the sole primary beneficiary, they have more options, including claiming the IRA as their own. However, both spouse and non-spouse beneficiaries can choose from the following: establish and keep the account as an Inherited IRA, take a lump sum distribution, which can leave them with large tax consequences, or disclaim the IRA, refusing the inheritance.

What are the Benefits of an Inherited IRA?

A self-directed inherited IRA gives you endless investing options and the potential to continue to grow the account tax-deferred.
Avoid paying estate taxes – the money transfers from the deceased person’s IRA to the inherited IRA with no additional taxes applied.
If the account is a Traditional IRA, beneficiaries only pay taxes when they take a distribution from the account.
If the account is a Roth IRA, beneficiaries may be able to take tax free distributions if eligible.
No penalties on withdrawals.

Inherited IRA Distribution Rules

If using the 10-year rule, the beneficiary is able to withdraw any amount at any time as long as the entire IRA balance is withdrawn by December 31st of the 10th year after the original IRA owner’s death.
If the beneficiary is chronically ill, disabled, a minor, or not more than 10 years younger than the original owner, the beneficiary also has the option to take life expectancy payments. (See FAQs for more information.)
If the deceased account holder has reached the required beginning date for Required Minimum Distributions (RMD) and has not yet taken their RMD for the year, the beneficiary is required to take it or face IRS penalties of 25% of the amount not distributed.

Frequently Asked Questions

What types of IRAs can be inherited?

Any type of IRA that has a designated beneficiary can be an inherited IRA, including a Traditional, Roth, SEP, and Simple IRA, as well as employer plans like a 401k, 403b, Teacher Retirement System, TSP (Thrift Savings Plan), etc.

I recently inherited an IRA and 403B plan held at another custodian, can I transfer these to QTC for Self-Directing?

Yes. First you will want to claim the IRA where it is currently held and establish as an Inherited IRA. Certain employer plans like 401ks and 403(b) may be distributed directly to a QTC account. Reach out to an IRA Specialist or a member of our Inherited team for assistance with transferring your Inherited IRA to a QTC self-directed account.

I need to report the passing of an account holder at Quest Trust Company, what do I need to do?

To report the passing of a QTC account holder, please reach out our office. To verify the passing we will need certified copies of their death certificate. If an account holder passes away abroad, the local U.S. Embassy can assist in certifying the death records. Original documents are required.

What are Life Expectancy Payments?

Life expectancy payments refers to the minimum amount that must be taken by a beneficiary from their inherited IRA every year until the account is depleted. The beneficiary generally must take annual distributions of a minimum amount based on their single life expectancy, beginning December 31st of the year following the year of the IRA owner’s death. Spouse beneficiaries may delay payments until the year the RMD is required to begin for the IRA owner.

Is there a deadline for choosing a distribution option?

The beneficiary generally has until December 31st of the year following the year of the IRA owner’s death to select an option. At any time, the beneficiary can speed up the withdrawals or distribute the entire amount.

What are my beneficiary distribution options as a spouse?

If the IRA owner died after January 1, 2020, the spouse has the following options:

Treat the IRA as their own by transferring or rolling over the inherited IRA assets to the spouse’s own IRA.
Take a lump sum distribution, withdrawing the total amount of your inherited IRA assets from the IRA
Follow the 10-year rule and the beneficiary has up to 10 years to distribute all of the funds from the account.
Take life expectancy payments (see FAQ above)

What are my beneficiary distribution options if I’m not the spouse of the deceased account holder?

If the IRA owner died after January 1, 2020, non-spouses have the following options depending on their age and the age of the IRA owner.

A non-spouse that is more than 10 years younger than the IRA owner has the following options:

Take a lump sum distribution, withdrawing the total amount of the inherited IRA assets from the IRA.
Follow the 10-year rule and the beneficiary has up to 10 years to distribute all of the funds from the account.

A non-spouse that is not more than 10 years younger than the IRA owner, or is a minor child, disabled or chronically ill, has the following options:

Take a lump sum distribution, withdrawing the total amount of the inherited IRA assets from the IRA.
Follow the 10-year rule and the beneficiary has up to 10 years to distribute all of the funds from the account.
Take life expectancy payments (see FAQ above).

What are the beneficiary distribution options if the beneficiary is a minor?

As a minor, they may start single life expectancy payments, but must distribute the entire balance within 10 years after reaching the age of majority.

Can I name a trust as a beneficiary to my IRA?

Yes. When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA is maintained as a separate account that is an asset of the trust.

To be considered a qualified trust, the trust must:

be valid under state law,
be irrevocable or, become irrevocable upon the IRA owner’s death, and
have identifiable beneficiaries listed.

In addition, the trustee of the trust must provide a copy of the trust instrument or qualifying documents to the financial organization by October 31st of the calendar year immediately following the year of death. Documentation provided by the trustee must show who the trust beneficiaries are as of September 30th of the year following the year of death.

Have Questions?

Talk to a certified IRA Specialist. Schedule a 1-on-1 consultation today!