8 Things You Need to Know About Your Inherited IRA

8 Things You Need to Know About Your Inherited IRA

By Sarah Brenner, JD
Director of Retirement Education

A significant percentage of IRA assets will ultimately go to nonspouse beneficiaries. When these beneficiaries inherit the funds, special rules kick in. Inherited IRAs are not like other IRA accounts. Here is what you need to know if you inherited an IRA from someone who is not your spouse.

1. You should consider all your options before doing anything with your inherited IRA. If you inherit an IRA, you need to move cautiously. You have time to make decisions, so don't rush. You will want to notify the IRA custodian of the death of the IRA owner if that has not already happened. You will also want to be sure that the beneficiary account is set up properly. Each custodian will do things a little differently, but you will want to make sure that the account is titled with you as the beneficiary of the deceased IRA owner. This is not a taxable event.

Do not take any distributions unless you are sure that is what you want. Distributions cannot be put back if you change your mind and there are likely to be tax consequences. An unwanted or unneeded distribution is a mistake that cannot be fixed.

How Many Beneficiaries Can I Have for My IRAs?

Every month, IRA expert Ed Slott is taking your questions about Individual Retirement Accounts on AARP:

I have two Roth IRAs at separate brokerage firms. I want to name my wife as beneficiary for one account and my son as beneficiary for the other.

When I die, can my wife convert her account into her own Roth IRA so she does not have to withdraw the money in 10 years? My son (he is above 18) will get the other account, and will have to withdraw the money in 10 years.

Yes, you can name different beneficiaries for each of your Roth accounts.

On the Roth account you are leaving to your wife, yes, she can roll that over to her own Roth IRA as a spousal rollover.

Since she now becomes the Roth IRA owner, like all Roth IRA owners, she is not subject to any required minimum distributions (RMDs) during her lifetime, so she can keep these Roth funds growing tax free for the rest of her life. If she does need any of the funds, she can withdraw them at any time, and in any amount she wishes. Those distributions will almost always be free from income taxes to her.

Q: Does the SECURE Act have any implication to Roth IRA account inheritance longevity?

Answer

Q: We have a situation where a client who had an inherited IRA (from his father) has just passed away and his beneficiary was his spouse. So, we're not sure what happens. Some say that she would now own the inherited IRA and would be able to continue to receive RMD payouts under her deceased's husband's life expectancy. Others say she has an inherited IRA that needs to be liquidated in a 10-year time period. What do I do now?

Answer

Q: Can you take a coronavirus-related distribution (CRD) under the CARES Act from an inherited IRA and pay it back over 3 years?

Answer

Q: A client transacted a "reverse rollover" from their traditional IRA in 2020 into their corporate 401(k) plan. After doing so, but in the same year, they made a non-deductible IRA contribution, then transacted a Roth conversion with these monies. Does this Roth conversion fall under the pro rata rules due to it being done in the same year, but after the reverse rollover was completed?

Answer

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