If you inherit an IRA, here are the rules directly from the IRS
As we get older, it is likely that we might inherit an IRA
from mom or dad – or we need to counsel mom or dad
as they inherit an IRA after one of them dies. The rules
are different in each scenario and due to the passage of
the SECURE Act, the rules have changed.
Thankfully, the Internal Revenue Service succinctly
explains the choices one has on how to treat an
inherited IRA. Here are the choices, copied (not
summarized) directly from the IRS website:
“A beneficiary can be any person or entity the owner
chooses to receive the benefits of a retirement account
or an IRA after he or she dies. Beneficiaries of a
retirement account or traditional IRA must include in
their gross income any taxable distributions they
Inherited from spouse. If a traditional IRA is inherited
from a spouse, the surviving spouse generally has the
following three choices:
1. Treat it as his or her own IRA by designating
himself or herself as the account owner
2. Treat it as his or her own by rolling it over into a
traditional IRA, or to the extent it is taxable, into
a. Qualified employer plan,
b. Qualified employee annuity plan (section
c. Tax-sheltered annuity plan (section 403(b)
d. Deferred compensation plan of a state or
local government (section 457(b) plan), or
3. Treat himself or herself as the beneficiary rather
than treating the IRA as his or her own.
If a surviving spouse receives a distribution from his or
her deceased spouse's IRA, it can be rolled over into an
IRA of the surviving spouse within the 60-day time limit,
as long as the distribution is not a required distribution,
even if the surviving spouse is not the sole beneficiary
of his or her deceased spouse's IRA.
Inherited from someone other than spouse. If the
inherited traditional IRA is from anyone other than a
deceased spouse, the beneficiary cannot treat it as his
or her own. This means that the beneficiary cannot
make any contributions to the IRA or roll over any
amounts into or out of the inherited IRA. However, the
beneficiary can make a trustee-to-trustee transfer as
long as the IRA into which amounts are being moved is
set up and maintained in the name of the deceased IRA
owner for the benefit of the beneficiary.
Like the original owner, the beneficiary generally will
not owe tax on the assets in the IRA until he or she
receives distributions from it.
Generally, the entire interest in a Roth IRA must be
distributed by the end of the fifth calendar year after
the year of the owner's death unless the interest is
payable to a designated beneficiary over the life or life
expectancy of the designated beneficiary.
If paid as an annuity, the entire interest must be
payable over a period not greater than the designated
beneficiary's life expectancy and distributions must
begin before the end of the calendar year following the
year of death. Distributions from another Roth IRA
cannot be substituted for these distributions unless the
other Roth IRA was inherited from the same decedent.
If the sole beneficiary is the spouse, he or she can either
delay distributions until the decedent would have
reached age 70½ or treat the Roth IRA as his or her
Beneficiaries of Qualified Plans
Generally, a beneficiary reports pension or annuity
income in the same way the plan participant would
have reported it. However, some special rules apply.
A beneficiary of an employee who was covered by a
retirement plan can exclude from income a portion of
nonperiodic distributions received that totally relieve
the payer from the obligation to pay an annuity. The
amount that the beneficiary can exclude is equal to the
deceased employee's investment in the contract (cost).
If the beneficiary is entitled to receive a survivor annuity
on the death of an employee, the beneficiary can
exclude part of each annuity payment as a tax-free
recovery of the employee's investment in the contract.
The beneficiary must figure the tax-free part of each
payment using the method that applies as if he or she
were the employee.
Benefits paid to a survivor under a joint and survivor
annuity must be included in the surviving spouse’s gross
income in the same way the retiree would have
included them in gross income.”
What should you do?
Consulting your financial advisor for guidance,
especially to confirm that the decisions you make are
consistent with your overall financial plan, is a good
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