Rules When Inheriting an IRA as a Beneficiary

What Is an Inherited IRA?

An inherited IRA, also known as a beneficiary IRA, is an IRA account you inherit from someone who has died. Anyone can inherit an IRA, including spouses, family members, and non-related individuals, as well as estates and trusts.

Rules Surrounding Inherited IRAs

How the inherited IRA is handled depends on your relationship to the deceased person, as well as your age.

For example, rules governing an inherited IRA from a spouse are different from the rules for a non-spouse beneficiary. The age of the beneficiary at time of inheriting the IRA is another factor.

Who Can Be a Beneficiary of an Inherited IRA?

The IRS defines three categories of beneficiary:

  • Eligible Designated Beneficiary
  • Designated Beneficiary
  • Non-Designated Beneficiary

Eligible Designated Beneficiaries

This category includes a

  • Surviving spouse
  • Disabled person
  • Chronically ill person
  • Minor child
  • Person who is not more than 10 years younger than the account owner

Eligible designated beneficiaries may also include trusts created to benefit disabled or chronically ill beneficiaries. Except for minor children, these beneficiaries may take distributions over their own life expectancy. Minor children beneficiaries are required to take all distributions within 10 years of reaching the age of majority.

Designated Beneficiaries

A designated beneficiary is a non-spouse who doesn’t fall under one of the eligible designated beneficiary categories. This could be, for example, an adult son or daughter, or certain types of trusts. Designated beneficiaries must use all of the funds in an inherited IRA within 10 years of the original IRA owner’s death.

Non-Designated Beneficiaries

This includes charitable organizations, estates, and nonqualified trusts. These types of beneficiaries must withdraw the entire inherited IRA funds within five years of the IRA owner’s death (if distributions had not already begun before the person’s death, in the case of traditional IRAs). Read more details on IRA distributions for beneficiaries.

What Happens to IRA Funds When Someone Dies?

If the beneficiary is someone other than the surviving spouse, the IRA funds must be transferred from the deceased person’s IRA into an entirely new IRA beneficiary account.

Bear in mind that inherited IRA rules can be complicated. We highly recommend talking to a tax advisor about your options before deciding how to proceed.

Inherited IRA Rules for Spouses

Spousal inheritance rules are different if the account holder died before 2020 vs. having died in or after 2020. This article focuses on spousal inheritance rules when the account holder has died in 2020 or later.

Account Holder Has Died in 2020 or Later

Spousal Beneficiary Options with a Traditional IRA

If the account holder of a traditional IRA died before they were required to begin taking Required Minimum Distributions, the spouse beneficiary has two options:

  1. Maintain the account as an inherited account.
    • This allows the surviving spouse to delay taking RMDs until the account holder would have turned 73* at which time the surviving spouse could begin taking distributions based on their own life expectancy, or
    • The spouse could follow the 10-year rule; that is instead of taking life-expectancy distributions from the account, the spouse would withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death.
  1. Roll over the account into their own IRA and continue following the rules governing contributions/distributions, RMDs, etc.

If the account holder died after the date they were required to begin taking RMDs, the spouse beneficiary may:

  1. Keep the account as an inherited account and take distributions based on their own life expectancy, or
  2. Rollover the account into their own IRA and continue following the rules governing contributions/distributions, RMDs, etc.

Spousal Beneficiary Options with a Roth IRA

A surviving spouse has two options when they inherit their deceased spouse’s Roth account:

  1. The surviving spouse can transfer the Roth IRA funds to their own IRA account; with all the same Roth rules governing contribution and distribution. The spouse can keep contributing to their Roth and take distributions without paying penalties or taxes as long as they held their own Roth account for five years and they are 59½ or older.
  2. The spouse could instead roll the inherited Roth assets into a new Roth account (also known as an inherited IRA). In this case, the surviving spouse may not contribute to that IRA and must hold that account for five years before tapping into those funds. If the spouse withdraws funds prior to the five-year period, they may be liable for a penalty on the earnings. Find out more from the IRS about IRA beneficiaries and distributions.

Can You Convert an Inherited IRA to a Roth?

Only the spouse of the deceased person is permitted to convert an inherited IRA to a Roth. Any other type of beneficiary may not convert an inherited IRA to a Roth IRA.

The spouse of the original IRA account holder should consider the following factors when converting to a Roth:

  • Have your own account.
    You’ll need to set up your own Roth IRA in advance.
  • Pay your taxes up front.
    Be aware that you’ll have to pay taxes up front on the inherited assets you’re converting to a Roth. Ideally, you’ll want to have money set aside to handle the tax impact rather than paying the taxes out of growing funds. You also have the option to incrementally convert to a Roth over several years to minimize the tax impact.

Instead of converting, a direct transfer of IRA assets from your spouse’s account to your own may be the best option to avoid fees (and hassle).

Inherited IRA Rules for Non-Spouses

One of the main differences for non-spousal IRA beneficiaries is that you can't roll the inherited IRA assets into an existing IRA, and you can't contribute to an inherited IRA in the future. Assets must be transferred to a new inherited IRA account.

According to the SECURE Act 1.0, an inherited IRA must be paid out completely to non-spouse beneficiaries within 10 years of the death of the original IRA account holder (often referred to as the 10-year rule). Moreover, the beneficiaries must also take RMDs in the same period.

Important: Federal legislation changed in October 2022, which affects IRA beneficiaries and how distributions are made. It’s critical that you consult with a tax advisor to ensure you are taking distributions according to the most recent rules.

Inheriting an IRA from a Parent

If you’re the minor son, daughter, stepson or stepdaughter, legally adopted child, or eligible foster child of the original IRA holder, you are an eligible designated beneficiary and can begin taking distributions as determined by IRS life expectancy tables. Upon reaching the age of majority, adult children must follow the same 10-year rule as designated beneficiaries.

What About Multiple Inherited IRAs and Multiple Beneficiaries?

If you are one of multiple IRA beneficiaries, things can get complicated, particularly if one of you is considered an eligible designated beneficiary and another is a designated beneficiary. There are different distribution rules for each.

In this case, it’s recommended that you have separate beneficiary accounts so it’s easier to manage the distributions and respective rules.

If you, individually, have inherited more than one IRA, you may not transfer the funds to your own IRA account—unless you are the spouse of the original IRA owner. You may have other options available to you, however, such as combining like IRA accounts with like accounts. Again, you would want to discuss this with your tax advisor. 

Taking RMDs from an Inherited Traditional IRA

If your parent already made the RMD for the year in which they passed away, you do not have to take a withdrawal for them for that year.

If they didn't make an RMD for that year, you’ll need to withdraw the RMD by December 31 of the year in which they passed away. The only exception to the rule occurred in 2020, with passage of the CARES Act.

Calculating an RMD on an Inherited Traditional IRA

The RMD you take in the year you inherit the IRA will be whatever the account owner would have withdrawn for that year. Thereafter, your RMDs will depend on when the original account holder passed away and the type of beneficiary you are.

Again, due to recent tax code changes, different distribution rules apply to different beneficiaries. Be sure to consult with a tax advisor to ensure you are meeting the requirements.

Follow the IRS guidelines on RMDs after the account owner dies.

Taxes on an Inherited Traditional or Roth IRA

Withdrawals from an inherited traditional IRA are taxed as ordinary income. Typically, Roth IRA distributions aren't taxable, except in cases when the original IRA owner had held the account for less than five years.

Need Guidance on Inherited IRAs?

Talk to your employer or contact MissionSquare Retirement.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).

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