Inherited IRA: What’s Next?

What happens to a Traditional IRA when the owner has passed and a non-spouse is inheriting? A non-spouse beneficiary has two choices.

Lump Sum

One choice is to take a lump-sum distribution. In this case, even if you as the beneficiary are under age 59 ½, the 10% early withdrawal penalty is waived. To do this, you would need to transfer the assets into an account in your name, and then distribute the assets in a lump sum. All the funds are distributed at once and all applicable income taxes will be due at once. Depending on the size of the assets, this option may put you into a higher tax bracket for the year of the distribution.

Beneficiary IRA

Another option is to transfer the assets into an inherited IRA, also called a beneficiary IRA. With this option, the assets can continue to grow tax deferred and you will be able to designate your own beneficiaries. You would need to open and transfer the assets into a beneficiary IRA held in your name.

Distributions

Distributions can be taken at any time, but are subject to required minimum distributions (RMDs). The early withdrawal penalty waiver also applies. RMDs are taxable and included in your gross income for the year. Your own life expectancy is used to calculate RMDs. Generally, RMDs must begin by December 31 of the year after the original owner’s death. However, there are two different paths to take depending on the original owner’s age.

Scenario 1

If the original owner was over age 70 ½ and had not taken his/her RMD in the year of death, then that RMD is due for distribution in the year of death still, or penalties apply. The penalty for failure to take RMDs on schedule is 50% of the amount of RMD not taken. This penalty does not include the amount in taxes from the withdrawal.

Scenario 2

If the original owner was under age 70 ½, you as the beneficiary also have the option of delaying distributions – i.e., not taking RMDs on schedule without penalty. With this option however, all the assets must be distributed by December 31 of the fifth year after the original owner’s death. So in short, in the second caveat, if you take RMDs on schedule, you can stretch out distributions over your life expectancy. If you delay, all assets must be distributed within 5 years.

If you are sharing the inheritance with others, then you would need to establish separate accounts for each beneficiary by December 31 of the year following the year of the original owner’s death in order to use your own life expectancy. If you miss this date, the RMDs will be based on the life expectancy of the oldest beneficiary, which, if it isn’t you, will result in a higher RMD amount.


Need to open up a beneficiary IRA or have more questions? Contact Us

Recent posts

  • Pros and Cons of Dividend Investing
  • Should I invest if I want to retire early?
  • Exploring France During Your Retirement Years
By Published On: October 10, 2014

Share This Story, Choose Your Platform!

Wiser Wealth Management, Inc (“Wiser Wealth”) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). As a registered investment advisor, Wiser Wealth and its employees are subject to various rules, filings, and requirements. You can visit the SEC’s website here to obtain further information on our firm or investment advisor’s registration.

Wiser Wealth’s website provides general information regarding our business along with access to additional investment related information, various financial calculators, and external / third party links. Material presented on this website is believed to be from reliable sources and is meant for informational purposes only. Wiser Wealth does not endorse or accept responsibility for the content of any third-party website and is not affiliated with any third-party website or social media page. Wiser Wealth does not expressly or implicitly adopt or endorse any of the expressions, opinions or content posted by third party websites or on social media pages. While Wiser Wealth uses reasonable efforts to obtain information from sources it believes to be reliable, we make no representation that the information or opinions contained in our publications are accurate, reliable, or complete.

To the extent that you utilize any financial calculators or links in our website, you acknowledge and understand that the information provided to you should not be construed as personal investment advice from Wiser Wealth or any of its investment professionals. Advice provided by Wiser Wealth is given only within the context of our contractual agreement with the client. Wiser Wealth does not offer legal, accounting or tax advice. Consult your own attorney, accountant, and other professionals for these services.

Sign up for our newsletter!

Our latest blogs, podcasts, and educational videos delivered to your inbox weekly.