The traditional Individual Retirement Arrangement (IRA) was established in the US in 1974. Today, many IRA account assets are being passed to beneficiaries, most often as inherited IRA accounts. Inherited IRAs come with their own rules, which differ from traditional IRA accounts. Those rules dictate how inherited assets can be titled, and how and when they can be distributed to each beneficiary.
Memorizing the entire list of rules is extensive. We summarized some of the finer points that impact how the rules apply when inheriting IRA assets. They include:
1. Beneficiary’s relationship to the original IRA account owner – A spouse can treat the assets as his/her own, a non-spouse (e.g., child or sibling) must open an inherited IRA.
2. Date the original owner passed away – When a beneficiary must begin withdrawing assets depends on the original owner’s date-of-death.
3. Age of the original account owner – The beneficiary’s options for fulfilling the IRS Required Minimum Distribution (RMD) depends on if the original account owner passed away prior to reaching age 70 ½.
4. Intended purpose of the inherited assets – How the beneficiary plans to use the assets determines his/her own distribution strategy. For example, he/she may withdraw all inherited assets immediately in lump sum or distribute them over time.
5. Tax consequences – All distributions are taxable to the beneficiary so contacting a professional accountant or other tax preparer before deciding on a distribution strategy is recommended.
If you have questions specific to inherited IRAs, please call or email us, we are happy to help!