What are the rules for inherited IRA distributions?

When inheriting an Individual Retirement Account (IRA), it’s essential to understand the rules surrounding distributions, as they differ for spouses and non-spouses. Knowing these guidelines can help ensure compliance with IRS regulations and optimize tax planning strategies.

Spousal Inheritance

Spouses who inherit an IRA have the most flexibility. They can choose to treat the inherited IRA as their own, allowing them to consolidate it with their existing retirement accounts without any special restrictions. This option provides continued tax-deferred growth and enables the surviving spouse to follow standard withdrawal rules based on their own retirement timeline.

Non-Spouse Inheritance

Non-spouse beneficiaries, like children or siblings, must fully distribute the IRA within 10 years. If the original owner had started required minimum distributions (RMDs), the beneficiary must continue them annually. Otherwise, withdrawals can be taken at any time within the 10-year period.

Tax Considerations

The 10-year rule can have significant tax consequences, especially for beneficiaries in higher tax brackets. Large distributions taken all at once may result in higher taxable income, while spreading them out over time can help minimize the tax burden. Consulting with a financial advisor can help beneficiaries develop a distribution strategy that aligns with their financial goals and tax situation.

Special Cases

Certain exceptions to the 10-year rule exist. For example, minor children who inherit an IRA may delay the start of the 10-year distribution period until they reach the age of majority. Additionally, siblings who are close in age to the deceased may qualify for special provisions that alter their required distribution timeline.

Inherited IRA Rules

Understanding inherited IRA rules is crucial for making informed financial decisions. Whether inheriting as a spouse or a non-spouse, beneficiaries should evaluate their options carefully and consider professional guidance to navigate tax implications and maximize the benefits of their inheritance.

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Shawna Theriault, CFP®, CPA, CDFA®
Senior Financial Advisor, Wiser Wealth Management

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