Are you Inheriting an IRA?

You’re going to want to know the rules.

Here are 4 things to consider and 1 TLDR:

1. Inherited IRA—If your Spouse Dies: If your spouse dies, and you are the sole beneficiary of his/her Individual Retirement Account (IRA), you can take over the account (i.e. spousal transfer/ “assuming” the IRA), and the IRS will treat it as though it has been yours all along.
   
   You can even keep making contributions to the inherited IRA, and the schedule for required minimum distributions (RMDs) is reset so that it’s based on your own life expectancy.
   
   Logistically speaking, you can either have yourself designated as the account owner, you can roll it over to your own IRA (assuming it’s the same type, Roth vs Traditional) or you can open a new IRA and roll the assets into that one. You can even take a lump sum distribution (just be mindful of the taxes).

2. Inheriting an IRA from Your-NON Spouse: Did you know if you inherit an IRA from someone other than your spouse, you have to roll the assets over into a new account specifically designated as an “Inherited IRA”?
   
   You can’t just roll the money into your own IRA b/c you may have to follow the Required Minimum Distribution (RMD) schedule based on the life expectancy of the deceased owner.
   
   These same rules apply if the deceased is your spouse, but you are NOT the sole beneficiary of the IRA.

3. The 10 Year Rule: Critically important, in most cases, if you inherit an IRA, you have 10 years (from the date of the account owner’s death) to deplete it (you can withdraw the money in any cadence or lump sum you want) (and this applies if the owner died after 12/31/19).
   
   Just know, you have to pay ordinary income taxes on the withdrawals (unless you’re a minor, then the 10-year depletion clock may start when you turn 18. And if you’re not more than 10 years younger than the account owner, then you can stretch the withdrawals over your lifetime).

4. The 5-Year Rule for Inherited ROTH IRAs: If you inherit a Roth IRA, you can withdraw the original owner’s CONTRIBUTIONS tax free at any time, but the EARNINGS on those contributions may be taxed if you withdraw them sooner than 5 years after the original owners death.
   
   Also, critically important, even though Roth IRAs have no RMDs, inherited Roth IRAs do! (over the new owner’s lifetime). Any if you miss an RMD, the penalty can be as high as 50%!
   
   

TLDR: If your spouse dies, and you are the sole beneficiary of his/her IRA, you can take it over and the IRS will treat it as if it was always your IRA. If you’re not the spouse (or you’re the spouse but not the 100% beneficiary), then you have 10 yrs to withdraw all the money from the “inherited IRA” (exceptions apply, such as minors), and you will be taxed on the withdrawals as income. If it’s a Roth IRA, there are no taxes on withdrawals, subject to the 5 year rule on earnings (but not contributions) and you must take RMDs (or pay a hefty penalty).