Inheriting IRA’s can be a blessing, and a headache. It’s comparable to walking into an Ice Cream shop and having your excitement quickly replaced with uncertainty of which flavors to get. There are a variety of ways to go about inheriting IRA’s, all are listed below. We searched the web for the best way to present inherited IRA options, depending on various situations, and found a great resource from Charles Schwab that we have included this post. To simplify the process, first determine:

  1. Is the IRA to be inherited Traditional or Roth?
  2. Is the IRA being Inherited from a spouse?
  3. Was the original owner of the IRA over or under 72?

Once these have been determined, you can skip to applicable options down below.  If you would like help determining the best option for you and your unique financial situation, that’s why we’re here. Please reach out to us at info@cosnerfg.com.

Traditional IRA: Spouse inherits

When inheriting a Traditional, Rollover, SEP, or SIMPLE IRA from a spouse, you have several options. Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA. However, all options should be evaluated to determine which is right for you.

If your spouse (the account holder) was under 72, these are your choices:

Account type You transfer the assets into your own existing or new IRA.
Money is available At any time, but a penalty will apply to withdrawals made before you reach age 59½.
Other considerations
  • Only available if you are the sole beneficiary.
  • IRA assets can continue growing tax deferred.
  • If you are under 59½ you’ll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions without paying the 10% early withdrawal penalty—unless you meet one of the IRS penalty exceptions.
  • You may designate your own IRA beneficiary.

Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

Required Minimum Distributions (RMDs) are mandatory, and you have the option to postpone distributions until the later of:

    • When the decedent would have attained age 72, or
    • 12/31 of the year following the year of death.

Distributions must begin no later than 12/31 of the year the account holder would have reached 72.
Other considerations
  • Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory, and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax deferred.
  • You may designate your own IRA beneficiary.

Account type You transfer the assets into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • You are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred for up to ten years.
  • You may designate your own IRA beneficiary.

Account type None. All assets in the Traditional IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

If your spouse (the account holder) was OVER 72, these are your choices:

Account types You transfer the assets into your own existing or new IRA.
Money is available

At any time, but a penalty will apply to withdrawals made before you reach age 59½.
Other considerations
  • Only available if you are the sole beneficiary.
  • IRA assets can continue growing tax deferred.
  • You must take an RMD for the year of death (if the account holder did not already take it).
  • If you are under 59½ you’ll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions other than RMD for the year of the death without paying the 10% early withdrawal penalty.
  • You may designate your own IRA beneficiary.

Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder’s death.

Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Other considerations
  • Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder’s remaining life expectancy, whichever is longer.
  • If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.

Account type None. All assets in the Traditional IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Traditional IRA: Non-spouse inherits

When inheriting an IRA from someone other than your spouse, there are different withdrawal rules depending upon the type of beneficiary you are (Eligible Designated Beneficiary or Designated Beneficiary).

Eligible Designated Beneficiaries that are not the spouse include:

  • Minor children of the original account holder (decedent).
  • Those that are chronically ill.
  • Those that are permanently disabled.
  • Those that are not more than 10 years younger than the original account holder (ie – a sibling or friend that is age 60 when the account holder was age 69).

Designated Beneficiaries

  • If you do not meet the requirements to be considered an Eligible designated beneficiary, then if the account holder died after 2019, you will be required to fully distribute all assets by the end of the tenth year after the year the account holder died.
  • Note: If the original account holder did not take an RMD in the year of death and they were required to, an RMD must be taken from the account by 12/31 of the year the original account holder died.

Eligible Designated Beneficiary Options (other than a spouse)

Traditional: Non-spouse inherits

  • If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options.

If the account holder was under 72, these are your choices:

Account type You transfer the assets into an Inherited IRA held in your name.
Money is available

RMDs must begin no later than December 31 of the year after death.
Other considerations
  • Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year.

Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns that age of majority.  At that point, the distribution option is required to switch to the 10 year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns the age of majority.

  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.

Account type The assets are transferred into an Inherited IRA held in your name.
Money is available At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • You are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred for up to ten years.
  • You may designate your own IRA beneficiary.

Account type None. All assets in the Inherited IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

If the account holder was OVER 72, these are your choices:

Account type

You transfer the assets into an Inherited IRA held in your name.
Money is available
  • RMDs must start by December 31 of the year after death.

Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
Other considerations
  • Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder’s remaining life expectancy, whichever is longer.

Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns that age of majority.  At that point, the distribution option is required to switch to the 10 year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns the age of majority.

  • If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own beneficiary.

Account type None. All assets in the IRA are distributed to you.
Money is available All at once.
Other considerations
  • You will pay income taxes on the distribution all at once.
  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Roth IRA: Non-spouse inherits

If you inherit a Roth IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options.

Account type

You transfer the assets into an Inherited Roth IRA held in your name.
Money is available

Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death.
Other considerations
  • Distributions are spread over the beneficiary’s single life expectancy.

Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns that age of majority.  At that point, the distribution option is required to switch to the 10 year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns the age of majority.

  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.
  • Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free.
  • You may designate your own beneficiary.

Account type The assets are transferred into an Inherited Roth IRA held in your name.
Money is available At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the tenth year after the year in which the account holder died.
  • Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free for up to ten years.
  • You may designate your own beneficiary.

Account type None. All assets in the Roth IRA are distributed to you.
Money is available All at once.
Other considerations
  • Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.

Roth IRA: Spouse inherits

If you are inheriting a Roth IRA as a spouse, you have several options—including opening an Inherited IRA.

Account type You transfer the assets into your own existing or new IRA.
Money is available At any time, but earnings generally will be taxable until you reach age 59½ and the five-year holding period has been met.
Other considerations
  • Only available if the spouse is the sole beneficiary.
  • You’ll be regulated by the same distribution rules as if the IRA had been yours originally; normally early withdrawal penalties may still apply.
  • You may designate your own IRA beneficiary.

Account type You transfer the assets into an Inherited Roth IRA held in your name.
Money is available

Required Minimum Distributions (RMDs) are mandatory, and you have the option to postpone distributions until the later of:

  • When the decedent would have attained age 72, or
  • 12/31 of the year following the year of death.
Other considerations
  • Distributions are spread over the beneficiary’s single life expectancy.
  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.
  • Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free.
  • You may designate your own beneficiary.

Account type The assets are transferred into an Inherited Roth IRA held in your name.
Money is available At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.
Other considerations
  • Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the tenth year after the year in which the account holder died.
  • Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free for up to ten years.
  • You may designate your own beneficiary.

Account type None. All assets in the Roth IRA are distributed to you.
Money is available All at once.
Other considerations
  • If the account is less than five years old at the time of the account holder’s death, earnings are taxable.

Lastly, Beneficiary Assignment takes president over Will.

The beneficiary designation, assuming it names you directly, supersedes any provision in the will. Even if the will states that an IRA rollover or an IRA should be left to the estate, the beneficiary designation takes precedence.

If you have inherited an Individual Retirement Account (IRA) from a parent or any other relative that named you a beneficiary of the account, you do not need to turn the IRA account over to the estate regardless of what the will says or how the executor interprets the will.

If the will asks for “cash on hand” to be distributed among family members, this does not include the IRA account. Under no circumstances would you be required to provide the executor with the proceeds from the IRA.

If you have any questions, please reach out to us at info@cosnerfg.com.

Disclosures:

Some of this content was provided by Charles Schwab.

This material is for informational purposes only and is not investment, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Triad Advisors, LLC does not provide tax or legal advice. For tax advice, consult your tax professional.

Sources: 

Remaining Single Life Expectancy Table: https://www.fidelity.com/building-savings/learn-about-iras/irs-single-life-expectancy-table

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

https://www.schwab.com/ira/inherited-ira/withdrawal-rules