Can an Inherited IRA be Inherited Again and How it Works

An inherited IRA can indeed be inherited again, but it's essential to understand the rules and process involved. If the original beneficiary inherits the IRA and then passes away, the IRA can be inherited by their own beneficiaries.

The key is that the inherited IRA must be in a trust or be subject to a beneficiary designation. This allows the IRA to bypass probate and ensures a smooth transfer of assets.

Beneficiaries can choose to take a lump sum distribution, which may trigger taxes and penalties, or take annual required minimum distributions (RMDs) over their lifetime.

If you're dealing with an inherited IRA, you'll need to navigate the rules and regulations that come with it. Generally, you must withdraw RMDs from the account to avoid IRS penalties, and the amount depends on factors like your age, relationship to the beneficiary, and the account value.

You'll want to make sure you have clear beneficiary forms in place, as incomplete or ambiguous paperwork can cause problems later. In fact, if there's a discrepancy between a beneficiary form and the will, the beneficiary form will be heeded, not the will.

The SECURE Act has some specific rules for nonindividual beneficiaries, like the estate. If the original IRA owner hadn't reached RMD age, the estate follows the five-year rule for mandatory distributions. But if the original owner reached RMD age and died in 2020 or later, the estate may take distributions longer than the five-year rule.

Under the proposed IRS regulations, the estate must take annual RMDs over the deceased IRA owner's remaining single life expectancy, reduced by one each year that assets are left in the IRA.

Additional reading: Inherited Ira 10-year Rule Example

An inherited IRA can be a complex beast, but let's break down the basics first. Any type of IRA can be turned into an inherited IRA, including traditional and Roth IRAs, SEP IRAs, and SIMPLE IRAs.

The income tax treatment of the IRA remains the same from the original account to the inherited IRA. Accounts made with pre-tax dollars or after-tax dollars are still treated the same way in an inherited IRA.

You have many choices to make when inheriting an IRA, and it depends on your situation. If you're the spouse of the original owner, you have one set of choices, while being a minor child, chronically ill, or disabled, or not more than 10 years younger than the original owner, gives you another set of options. Everyone else has a still-different set of choices.

The original account owner's required minimum distributions (RMDs) can also influence what you can and should do with the IRA. Some experts advise IRA beneficiaries to meet with a financial advisor before making any decisions.

Here are the key factors that determine your choices:

These factors will help you understand your options and make informed decisions about your inherited IRA.

An inherited IRA can be a complex and confusing topic, especially when it comes to beneficiaries. If you inherit an IRA, you have many choices to make, depending on your situation.

You'll need to determine if you're a spouse, minor child, chronically ill or disabled, or not more than 10 years younger than the original owner, as this will affect your options.

The SECURE Act changed the rules for inherited IRAs, ending the practice of stretch IRAs. Now, beneficiaries are classified as eligible designated beneficiaries (EDBs), designated beneficiaries (DBs), or non-designated beneficiaries.

Here are the categories of beneficiaries:

The IRS allows a beneficiary to transfer an inherited IRA to a new beneficiary, but the new beneficiary must be a spouse, a child under the age of 21, a disabled or chronically ill individual, or a beneficiary who is no more than 10 years younger than the original beneficiary.

This transfer is called a "beneficiary-to-beneficiary transfer" and it's subject to the same rules as the original inherited IRA, including required minimum distributions (RMDs) and potential taxes on withdrawals.

For example, if a child inherits an IRA from a parent and then passes away, the IRA can be inherited by the child's spouse or children.

To be eligible for the more favorable "old rules", a beneficiary must meet certain criteria. This includes being a spouse beneficiary or a non-spouse beneficiary, as we'll cover in the following sections.

If you're a spouse beneficiary, you're in luck – you get to use the more favorable rules. This means you'll have more flexibility when it comes to inheriting your partner's IRA.

To qualify as an eligible beneficiary, you must meet the specific requirements outlined in the article. One of the key requirements is that the IRA owner died in 2019 or earlier. This is a crucial detail to keep in mind.

If you're a non-spouse beneficiary, you'll need to understand the specific rules that apply to your situation. We'll cover these rules in more detail in the following sections.

Here's a summary of the key points:

As you can see, being an eligible beneficiary can make a big difference in how you inherit your IRA. Take the time to understand the rules and requirements to ensure you're making the most of this opportunity.

If you're dealing with a inherited IRA and multiple beneficiaries, there's a crucial thing to know: each beneficiary is treated as a non-spouse beneficiary, which can limit their ability to "stretch" the IRA.

This means they'll have to use the life expectancy of the oldest beneficiary when calculating Required Minimum Distributions (RMDs), which can be less beneficial.

However, if the beneficiaries split the IRA into separate inherited IRAs by the end of the year following the year of the original owner's death, each beneficiary gets to use their own life expectancy for calculating RMDs, which can be a game-changer.

A spouse beneficiary will also be treated as a spouse beneficiary, allowing for more distribution options.

Here's a step-by-step guide to splitting an inherited IRA into separate inherited IRAs:

Note that if the original owner dies in 2020 or later and at least one beneficiary is a "non-eligible beneficiary", the whole account will have to be distributed within 10 years, unless the IRA agreement has a provision that immediately divides the IRA into separate IRAs for each beneficiary.

The Secure Act made significant changes to the rules for inherited IRAs, and it's essential to understand how these changes affect you. The Act was signed into law on December 20, 2019, and it applies to IRA owners who pass away on or after January 1, 2020.

One major change is that non-spousal beneficiaries are no longer able to stretch out required minimum distributions (RMDs) over their lifetime. This means that most adult children will fall into the category of designated beneficiaries, which has specific rules.

Designated beneficiaries include most adult children, as well as individuals who are 10 years or younger than the IRA owner. This is a significant change from the previous rules, where RMDs could be stretched out over multiple generations.

Here's a breakdown of the different categories of beneficiaries under the Secure Act:

Understanding these categories is crucial in determining how the Secure Act affects your inherited IRA.

Inherited IRAs can still be tools to build and preserve wealth.

The elimination of the stretch IRA means that wealth cannot continue to build for decades, so it's essential to review your estate planning.

Check with a financial planner or estate tax expert to ensure you're getting the most from an inherited IRA and not setting yourself up for penalties by not following the new rules and procedures.

Experts will also help you review any estate planning that was predicated on the use of stretch IRAs or other wealth-preservation strategies that may have changed.

You should review any existing estate planning to make sure it's still relevant and effective under the new rules.