Inherited IRA

What Is an Inherited IRA?

An inherited IRA is a separate IRA account that is opened when someone inherits an IRA upon the death of a spouse, family member, or non-family member. Also called beneficiary IRAs, the rules for inherited IRAs depend on the type of beneficiary you are (spouse, child, etc.) and the year you inherit the original IRA. Prior to January 1, 2020, all beneficiaries could stretch annual distributions from inherited IRAs throughout the course of their own lifetimes. But the passage of the SECURE Act eliminated that lifetime stretch ability for non-spouse beneficiaries who inherit an IRA on January 1, 2020 and after.

Inherited IRAs Can be Self-Directed

need a short blurb here

Rules for Spouses

Inherited IRA rules for spouses did not change with the passage of the SECURE Act.

Traditional, SEP, and SIMPLE IRAs
Roth IRAS

Traditional, SEP, or SIMPLE IRAS

  • Spouses can take a lump sum distribution of the entire account.
    • You will have to pay taxes on the distribution, but the early-withdrawal penalty is waived.
  • You can treat the IRA as your own and:
    • Transfer the cash/assets into your existing IRA or a new IRA in your name.
    • Leave funds in the plan for as long as IRS rules allow so you can accumulate additional tax-sheltered growth.
    • Withdraw funds anytime, but if you are not 59 ½ years or older, you’ll pay a 10 percent early-withdrawal penalty.
    • If the original IRA owner was taking RMDs, but had not taken one the year they died, you must take the RMD for that year. This distribution is penalty free.
  • As a spouse, you can open an inherited IRA in your own name, and you must:
    • Start taking distributions that are based on your life expectancy no later than December 31 of the year following the original plan owner’s death.
    • Take an RMD in the year of the original plan owner’s death if one was not already taken (if the plan owner was of retirement age and eligible for RMDs).

Roth IRAs

Spouses that inherit Roth IRAs can:

Same 3 options as Traditional, but different distro rules (tax free)

  • Take a lump-sum distribution to empty the inherited account.
  • Open an inherited Roth IRA in your name. This option only allows 5 years to deplete the funds and close the account.
  • Spouses can either leave the funds in the inherited plan or transfer them into an existing or new Roth IRA and treat the funds as if they are their own throughout their lifetimes.

Eligible Beneficiary Rules

The rules for eligible beneficiaries are the same regardless of when the IRA was inherited except when minor children are the beneficiaries.

  • Minor children who inherited the IRA in 2020 and later must take RMDs from the inherited plan until they turn 18 or 21 (depending on state laws), at which time their 10-year clock starts to deplete all inherited funds from the account. If they inherited the account prior to 2020, they can stretch their IRA distributions over the coarse of their lifetime.

Besides spouses and minor children, eligible beneficiaries are:

  • Beneficiaries who are disabled and/or chronically ill at the time of the plan owner’s death, as defined by IRC 72(m)(7), can take advantage of the lifetime stretch rule.
  • Beneficiaries who are not more than 10 years younger than the deceased (such as a sibling or a life-partner) can stretch distributions over their lifetimes.
Traditional, SEP, and SIMPLE IRAs
Roth IRAS

Traditional, SEP, and SIMPLE IRAs

  • Open inherited IRA plan and transfer funds from the deceased's account.
  • You cannot make contributions to this plan.
  • You must take annual RMDs, which are stretched over your life expectancy. You will not incur an early-withdrawal penalty for lifetime, stretch distributions.

Roth IRAs

  • You can take tax-free distributions of initial contributions to the account at any time.
  • If the account has been established for 5 or more years, distributions of Roth IRA earnings are tax-free.
  • If distributions of earnings are taken within the first 5 years after the original account was opened, these distributions will be subject to income tax.

Rules for Non-Spouse Beneficiaries

Non-spousal beneficiaries include children, grandchildren, etc., who are not considered eligible beneficiaries as defined by the IRS.

Please see the eligible beneficiary section if you are a not a spouse but are a beneficiary who is disabled, chronically ill, or a minor child. The information below is for all other non-spouse beneficiaries.

2020 and Later
Before 2020

For IRAs Inherited in 2020 and Later

Traditional, SEP, and SIMPLE IRAs

You have two options:

  1. You can take a lump sum distribution
  2. You can open a new inherited IRA and move the funds into that plan and comply as follows:
    • You have 10 years to deplete the inherited IRA. This 10-year clock starts the year after the original plan owner’s death.
    • You can’t contribute to this plan, but income grows until the funds are depleted.
    • You are not required to take annual RMDs. You can withdraw some funds one year, and none the next. But the account must be empty and closed by the end of the 10th year of the death of the original account owner.
    • If the original IRA owner was taking RMDs, you must take an RMD in the first year if they did not take one before their death.

Roth IRAs

There are two options:

  1. Take a lump-sum distribution to immediately deplete and close the the inherited account.
    • If the account is less than 5 years old, you will pay tax on the earnings.
  2. Open an inherited Roth IRA in your name.
    • You must distribute all funds, and close the account before the end of the 10th year of the original IRA owner’s death.
    • The original account must be at least 5 years old before you can take tax-free distributions on the earnings from the newly established inherited IRA.
    • Distributions of the initial contributions to the account can be taken tax-free at any time.

For IRAs Inherited Prior to 2020

Open an inherited IRA and transfer funds from the deceased's account into that plan.

With traditional, SEP, and SIMPLE IRAs:

  • You cannot make contributions to this plan but returns on the investments in the plan grow until the account is depleted.
  • Beneficiaries must take annual RMDs that are stretched over your life expectancy. There is no early-withdrawal penalty for lifetime, stretch distributions.
  • You must also take the original account owner’s RMD in the year of their death if they were required to but had already not taken one.

With Roth IRAs:

  • Tax-free distributions of initial contributions to the account can be taken at any time.
  • Distributions of Roth IRA earnings are tax-free only if the account has been established for 5 or more years.
  • Tax and penalties are assessed for distributions of earnings taken within the first 5 years the original account was opened.
  • Beneficiaries must take annual RMDs that are stretched over your life expectancy. There is no early-withdrawal penalty for lifetime, stretch distributions.

Note: These rules apply to all non-spouse beneficiaries and minor children.

Please note: The rules for trusts and estates differ from the rules for individual beneficiaries. Please consult your tax and/or estate planning professional for help navigating an inherited IRA for a trust or estate.