Key takeaways of inherited IRAs
If you have inherited an IRA or are listed as the beneficiary of someone's retirement account, learning about inherited IRA rules can help ensure you make the most of that money. It also can help you avoid unnecessary penalties.
Rules are different for different beneficiaries, but each person is subject to only a small portion of the rules, depending on when you inherited the account and your relationship with the original account owner.
Let's discuss what you need to know to effectively navigate the rules for inheriting an IRA.
What is an inherited IRA?
An inherited IRA, sometimes called a beneficiary IRA, is a distinct type of IRA used to transfer a tax-advantaged retirement account to a beneficiary after the original owner has died.
Like any asset or property you might inherit, an inherited IRA or other retirement account comes to you after the death of the original owner. Beneficiaries may choose to withdraw these accounts in a single lump sum, or they may want to roll the balance into a new inherited IRA to take advantage of further tax benefits. Inherited IRAs allow beneficiaries to transfer tax-advantaged retirement savings into an inherited IRA account in their name while keeping those funds separate from any other IRAs they may own, which aren't subject to the same distribution rules.
Types of accounts that may be transferred into inherited IRAs include both Roth and tax-deferred standard, SEP and SIMPLE IRAs. Workplace retirement plans such as
If you are a retirement account beneficiary, you'll be notified by the financial institution when they receive notice of the owner's death, usually from the estate's executor.
What type of beneficiary are you?
To understand your options for an inherited IRA, it's important to know which type of beneficiary you are. This depends in part on your age, situation and relationship to the original account owner. There are two types of beneficiaries: designated and eligible designated beneficiaries.
Eligible designated beneficiaries
Eligible designated beneficiaries (EDBs) include:
- The spouse or minor children of the account owner.
- People who are chronically ill or disabled.
- Someone not more than 10 years younger than the account owner.
Designated beneficiaries
A designated beneficiary (DB) is any person named as the beneficiary of an IRA who isn't an eligible designated beneficiary.
Let's go through an overview of the different options available.
An overview of inherited IRA options
Know the rules that apply to you
If you inherit an IRA, your options differ depending on the type of beneficiary you are and your relationship to the person who left you the IRA. The rules are not complicated, but it's important to follow them correctly and make the most of the potential tax benefits and avoid penalties.
For help sorting out how an inherited IRA fits into your plan,
