I recently inherited an IRA. What does this mean?
If you inherit an IRA you are considered the beneficiary. A beneficiary is any person or entity whom the account owner selects to receive the benefits of the IRA after he or she is deceased. Inherited IRAs are treated differently if inherited from a spouse versus inherited from anyone other than a spouse. Beneficiaries may also have different options depending on the type of IRA that has been inherited; Traditional v. Roth IRA.
Spouse as a beneficiary of a Traditional IRA. If you inherit a traditional IRA from your spouse you have three choices:
- Treat it as your own by designating yourself as the account owner. You will be considered to have opted to treat the IRA as your own if contributions (including rollover contributions) are made to the inherited IRA, or you do not take the RMD (Required Minimum Distribution) for a year as a beneficiary of the IRA.
- Treat it as your own by rolling it over into your IRA or into a qualified employer plan, qualified employee annuity plan, tax-sheltered annuity plan, or a deferred compensation plan of a state or local government.
- Treat yourself as the beneficiary rather than treating the IRA as your own. If you receive a distribution from your deceased spouse’s IRA you can roll that distribution over into your own IRA within the 60-day time limit as long as the distribution is not a required distribution (even if you are not the sole beneficiary of the IRA).
Non-spouse beneficiary of a Traditional IRA. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. You cannot make any contributions to the IRA and you cannot roll over any amounts into or out of the inherited IRA. You can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as the beneficiary. You will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.
Trust as a beneficiary. A trust cannot be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death if all of the following are true:
- The trust is a valid trust under state law, or would be but for the fact that there’s no corpus
- The trust is irrevocable or became, by its terms, irrevocable upon the owner’s death
- The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the owner’s benefit are identifiable from the trust instrument
- The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.
The deadline for the trustee to provide the beneficiary documentation to the IRA Custodian is October 31 of the year following the year of the owner’s death.
Required Minimum Distributions from Inherited IRAs
You are not required to take distributions from your Roth IRA at any age – the minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.
The rules for determining beneficiary required minimum distributions depends whether or not the beneficiary is the surviving spouse or an individual other than the surviving spouse, and if the owner died before, on, or after the required beginning date.
If you elect to be treated as the owner (and not as the beneficiary) of your deceased spouse’s IRA you will determine the required minimum distribution (if any) as if you were the owner beginning with the year you elect or deemed to be the owner. However, if you become the owner in the year your deceased spouse died you will not determine the required minimum distribution for that year using your life; instead you would take the deceased owner’s required minimum distribution for that year.
A single IRA can be split into separate accounts or shares for each beneficiary in the case multiple beneficiaries have been named. These separate accounts/shares can be established at any time, either before or after the owner’s required beginning date. Generally these separate accounts/shares are combined for purposes of determining the minimum required distributions, however, these separate accounts/shares will not be combined for RMD purposes after the death of the IRA owner if the separate accounts/shares are established by the end of the year following the year of the IRA owner’s death.
If a Roth IRA owner dies the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his/her required beginning date. Generally the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life expectancy of the designated beneficiary.
A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either; inherited the other Roth IRA from the same decedent, or was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA.
Your options as the beneficiary to an IRA can be complicated especially if there is a required minimum distribution. It is important to seek the advice of a CPA or tax specialist if you should inherit an IRA.
For additional information go to www.irs.gov