Inheriting an IRA can feel confusing, but it doesn’t have to be. I’m here to simplify the process so you know exactly how to set up an inherited IRA, move the money without triggering taxes, and understand the rules for taking distributions. Let’s take the stress out of it!
When you inherit an IRA, you can’t just leave it in the original owner’s name. You’ll need to open a new account called an Inherited IRA or Beneficiary IRA. This step is crucial because it keeps you compliant with IRS rules and helps you avoid unnecessary taxes and penalties.
One of the most common mistakes people make with inherited IRAs is accidentally causing a taxable event. Here’s how to avoid that:
- Do a Trustee-to-Trustee Transfer: This is key! The money should move directly from the original IRA to the new Inherited IRA account. You should never withdraw the funds yourself. If you take the money out first and then try to move it, the IRS will treat it as income—meaning taxes and possibly penalties.
- Title the Account Correctly: Make sure the new account is titled something like “[Your Name] as beneficiary of [Deceased’s Name] IRA.” This ensures the account remains tax-deferred and compliant.
The IRS has specific rules about when and how much you need to withdraw from an Inherited IRA. These rules depend on when the original account holder passed away and your relationship to them.
- Non-Spouse Beneficiaries: If you’re not the spouse, you generally have to withdraw all the money within 10 years of the original owner’s death. This is known as the 10-Year Rule. It must be withdrawn according to an IRS table. Which table you use would depend on whether the original owner was already taking distributions.
- Spouse Beneficiaries: Spouses have more flexibility. You can roll the IRA into your own account, or set up an Inherited IRA and follow the 10-year rule. You might even be able to delay distributions until the original owner would have turned 73.
- Eligible Designated Beneficiaries: This includes minor children, disabled individuals, or anyone less than 10 years younger than the original account holder. They can take distributions over their lifetime (the old stretch IRA rules). However, once a minor turns 18, the 10-year rule kicks in.
Missing an RMD can be costly. The IRS used to charge a 50% penalty on the amount you should have withdrawn, but that’s been reduced to 25%. Still, that’s a hefty fine for missing a deadline. Set reminders and stay on top of it!
Frequently Asked Questions About Inherited IRAs
- What happens if I don’t take RMDs from an inherited IRA?
You could face a 25% penalty on the amount you should have withdrawn. - Do I have to pay taxes on an inherited IRA?
Yes, distributions from a traditional inherited IRA are generally taxable. - Can I roll over an inherited IRA into my own IRA?
If you are a spouse, yes. Non-spouse beneficiaries must set up an Inherited IRA.
Inheriting an IRA doesn’t have to be complicated. Set up the Inherited IRA properly, transfer the money the right way, and keep track of your distribution requirements.
Not sure how to handle your inherited IRA? Let Hocheiser CPA guide you through every step from setting up your account to navigating complex tax rules. Reach out today for personalized support!
