Inherited IRA: What to Know

By: Tax Hotline
Summer 2018 (Vol. 36, No. 2)

If you inherit an IRA or workplace savings account directly from your spouse, you can:

  • Roll over the inherited assets into your own Traditional IRA.

  • Transfer your inherited assets to an Inherited IRA

  • Roll over and convert inherited IRA assets to your own Roth IRA

  • Disclaim all or part of your inherited assets

  • Leave the assets in the plan

  • If you inherit an IRA or workplace savings account from someone other than a spouse, you may:

  • Roll over the inherited assets to an Inherited IRA account and begin taking required minimum distributions by December 31 of the year following the account owner’s death.

  • Take a cash distribution of your share of the inherited amount.

  • Disclaim all or part of your inherited assets within nine months of the owner’s death so they pass to the next eligible beneficiaries.

  • Leave the assets in the plan. Depending on the plan, you may be able to transfer the inherited assets to an inherited account in the plan.

  • Required Minimum Distributions (RMD). RMDs are designed to ensure that investments in IRAs don’t grow tax-deferred forever. The rules for when IRA beneficiaries must take RMDs depend in part on the account owner’s age on the date of his or her death.

    Beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table (IRS Table I, Appendix B, Publication 590-B, Distributions from IRAs) The table shows a life expectancy based on the beneficiary’s age. The account balance is divided by this life expectancy to determine the first RMD. The life expectancy is reduced by one for each subsequent year. The following rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans.

    Spouses who are the sole designated beneficiary can:

  • Treat an IRA as their own, or

  • base RMDs on their own current age,

  • base RMDs on the decedent’s age at death, reducing the distribution period by one each year, or

  • withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date. If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70½ to begin receiving RMDs

  • Individual beneficiaries other than a spouse can:

  • Withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or

  • calculate RMDs using the distribution period from the Single Life Table based on:

    • If the owner died after RMDs began, the longer of the beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or the owner’s remaining life expectancy at death, reduced by one for each subsequent year.

    • If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.

    Roth IRA RMD Rules. The IRS provides for an automatic spousal rollover if your spouse is the sole beneficiary of the IRA and there would be no RMD requirement during the life of the surviving spouse. However, if the beneficiary is not your spouse, he or she would become subject to Required Minimum Distribution rules.

    The non-spouse beneficiary has two options:

  • They can take out the entire balance by December 31st of the year containing the fifth anniversary of the owner’s death, or

  • the beneficiary will have to start taking distributions over the beneficiary’s life expectancy, starting no later the December 31st of the year following the year of the owner’s death (this process is called the Term Certain Method).

  • If distributions to the beneficiary do not start by December 31st following the year of the owner’s death, the rule requiring a complete distribution of the plan balance within five years will become effective.