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Inherited IRA Basics

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401(k) Education

June 16, 2017

Inherited IRA Basics

Rules & Tips for Spouse and Non-Spouse Beneficiaries

If you've inherited an IRA or expect to inherit an IRA in the near future, there are some important rules regarding withdrawal, taxes and required minimum distributions (RMDs). The choices you make could have implications and the rules can be tricky. Making a mistake and not knowing the guidelines the IRS sets forth could cost you some of your inheritance.

An IRA first must have a beneficiary form on file with the custodian of the IRA account. This form controls who inherits an IRA. Without a beneficiary form on file, the custodian could either send it to the estate or pass it to the living spouse, if one exists. All custodians handle things differently in cases where beneficiary forms are missing.

Once a new inherited IRA account is titled and established as such, you’ll want to leave as much money as you can in the IRA account for tax-sheltered growth for years or even decades. You may certainly take the money out at any age without paying a penalty. However, you will be taxed on the money withdrawn.

If there is a living spouse to inherit an IRA, there is an option other than creating an Inherited IRA account. The spouse may roll the money into their current IRA. If the original IRA owner was older than 70 1/2, the RMD will need to be taken starting during the year of their death. If the original IRA owner had not reached 70 1/2, the living spouse does not have to withdraw money until they turn 70 1/2. Withdrawing money before age 59 1/2 though, would require paying a penalty, in addition to taxes.

Non-spouse beneficiaries have rules, including using an IRS life expectancy table to calculate an RMD for each year, if the original owner had turned 70 1/2. During the year of the owner’s death however, the owner’s RMD must be taken first. The amount needing to be withdrawn for future years depends on age and other factors. The RMD table can be found here. Yes, all withdrawals are taxable, and if the required minimum annual amount isn’t withdrawn, a penalty would apply.

If the IRA is a Roth, this account type is inherited tax-free. Although, non-spouse beneficiaries are still required to take RMDs based on their own life expectancy, starting the year following the original owner's death. Spouse beneficiaries may also choose to roll the Roth account into their own Roth account. Either way, taxes do not have to be paid on withdrawals.

It may be worth noting, if an estate tax was paid on the estate of the deceased, a deduction could potentially be taken to offset some of the IRA income withdrawn. Your tax and financial professionals can assist with the specifics regarding your individual situation and an inherited IRA, and whether this might apply to you. Lastly, ensuring the inherited IRA is titled properly is critical.

Have you inherited an IRA or are expecting to inherit an IRA? If so, schedule a 15-minute call with a Bayntree financial advisor to discuss how these rules might apply to your personal situation.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

‍Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

Insurance product guarantees are subject to the financial strength and claims-paying ability of the issuing company, and may be subject to restrictions, limitations or early withdrawal fees. Annuities are not FDIC insured.

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