I Inherited an IRA Now What: A Guide to Getting Started

Inheriting an IRA can be a complex and overwhelming experience, but don't worry, you're not alone. You have up to nine months to decide what to do with the inherited IRA, giving you time to gather your thoughts and seek professional advice.

You'll need to decide whether to take a lump sum distribution, which can be taxed as ordinary income, or to roll over the IRA into a new account, which can provide more control and flexibility. The tax implications of each option will depend on your individual circumstances and the type of IRA you've inherited.

A key consideration is the 10% early withdrawal penalty, which applies to inherited IRAs. However, if you're a beneficiary under the age of 59 1/2, you may be exempt from the penalty under certain circumstances.

On a similar theme: Inherited Ira Early Withdrawal Penalty

Inheriting an IRA can be a complex and often overwhelming experience, but it's essential to understand the basics to make informed decisions.

You have up to six months from the date of inheritance to decide what to do with the account, as stated in the article section "Understanding IRA Rollovers."

The type of IRA you've inherited will determine the distribution rules, which can be either a traditional or Roth IRA, as explained in "Types of IRAs."

You'll need to consider the required minimum distributions (RMDs) for the inherited IRA, which can impact your tax obligations, as mentioned in "Required Minimum Distributions."

An IRA, or Individual Retirement Account, is a type of savings account that helps you prepare for retirement.

IRAs are designed to help you save for retirement, and contributions are made with after-tax dollars, which means you've already paid income tax on the money.

You can contribute up to $6,000 in 2022, and if you're 50 or older, you can even contribute an extra $1,000 as a catch-up contribution.

The money in an IRA grows tax-deferred, meaning you won't pay taxes on the earnings until you withdraw the funds in retirement.

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An inherited IRA is a complex and often misunderstood concept, but it's essential to understand how it works to make informed decisions about your retirement savings.

You can inherit any type of 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, so accounts made with pre-tax dollars or after-tax dollars are still treated the same way.

The transfer of assets into a new inherited IRA must be made, even if a lump-sum distribution is planned, and you cannot make additional contributions to an inherited IRA.

Inherited IRAs are treated the same, whether they are traditional IRAs or Roth IRAs, but the tax treatment of withdrawals does vary.

You'll need to report inherited IRAs and their distributions on IRS forms 1099-R and 5498 for tax purposes.

Here are the key options you'll have when inheriting an IRA, depending on your relationship to the original owner and other factors:

These options can be influenced by whether the original account owner had to take required minimum distributions (RMDs) and whether you want to minimize taxes or maximize cash distribution from the account.

Inheriting an IRA can be a complex process, but it's essential to understand your options. You'll have to consider how to manage the funds until you reach the state's recognized age of adulthood.

If you're under the age of adulthood, a custodian may manage the money in the IRA on your behalf. This means they'll handle the account until you're old enough to take control.

You'll have complete access to the funds once you reach the state's recognized age of adulthood. At that point, you can withdraw funds from the IRA, but be aware that you may be subject to taxes on withdrawal.

Depending on the type of IRA, you may face certain tax implications. This is something to consider when deciding how to manage your inherited IRA.

As the beneficiary of an IRA, you have various options depending on your relationship to the decedent. Non-spouse designated beneficiaries must roll the assets over to an inherited IRA and most must withdraw all the money within 10 years.

You may be eligible for exceptions to this 10-year rule, such as being a minor child (not grandchild) of the original account owner, being chronically ill or disabled, or being no more than 10 years younger than the original account owner.

A missing or incomplete designated beneficiary form can create problems, so it's essential to ensure the form is completed and on record with the custodian.

As a spouse inheriting IRA funds, you have the most options, including taking a lump-sum distribution, rolling over inherited funds into your personal IRA, or transferring the inherited proceeds into an Inherited IRA.

If you're a non-spousal beneficiary, you can take a lump-sum distribution, disclaim the proceeds, or transfer the inherited funds into your own Inherited IRA.

Here are some key options for Eligible Designated Beneficiaries (EDBs) other than a spouse:

You'll likely need to pay taxes on an inherited IRA, but the good news is that you might be able to get a tax deduction for estate taxes paid on the account.

If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes.

Estates subject to the estate tax may be allowed an income-tax deduction for the estate taxes paid on the IRA. This can help reduce your taxable income.

For 2025, estates worth more than $13.99 million are subject to the estate tax, up from $13.61 million in 2024.

You might have $1 million of income with a $350,000 deduction to offset against that, making your taxable income $650,000.

It's not necessary that you were the person who paid the taxes; just that someone did.

You can choose to not take non-qualifying distributions that would otherwise be taxable. This can help minimize your tax burden.

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If you inherit a traditional IRA, you'll need to take required distributions (RMDs) to avoid penalties. The RMD rules can be complex, so it's essential to understand them.

If the original account owner died before taking their RMD, you'll need to take it out, or you'll be liable for a 50% penalty of the amount not distributed.

You have 10 years to withdraw all the money from the inherited IRA, unless you're a minor child, chronically ill or disabled, or not more than 10 years younger than the original account owner.

As a non-spousal beneficiary, you have several options for taking RMDs, including taking a lump-sum distribution, transferring the funds to an Inherited IRA, or disclaiming the proceeds.

Here are some strategies to consider when mapping out your RMD game plan:

The 10-year rule requires annual RMDs, but it's not necessarily a bad thing. Steady withdrawals over several years can help you avoid a late, large distribution that could push you into a higher tax bracket.

You can't take a required minimum distribution (RMD) from an inherited IRA, so you don't need to worry about that right away.

Inheriting an IRA can be a complex process, but it's essential to understand your options and responsibilities. You can choose to take a lump sum distribution, but be aware that this might trigger taxes and penalties.

You have several distribution options, including taking a lump sum, taking annual RMDs, or rolling over the IRA to your own IRA or a new employer-sponsored plan.

When you inherit an IRA, it's essential to treat the account balance as part of your overall asset mix. This means making sure your overall holdings of stocks, bonds, cash, and other assets are in line with your financial goals and risk tolerance.

You might need to diversify the account into investments with greater growth potential, especially if you don't need the money now. This could mean shifting away from 100 percent cash, like your older relative may have done to eliminate risk.

You can use annual distributions from the IRA to help fund everyday expenses if you're strapped for cash. But if you don't need the money, it might make sense to reinvest dollars you bring in from required withdrawals.

The updated RMD rule, which goes into effect in 2025, requires inherited IRA owners to take a minimum distribution each year if the original account owner was subject to RMDs. This rule applies to accounts inherited since 2020 and subject to the 10-year distribution rule.

You can't make additional contributions or roll into other retirement accounts you hold as a participant, so it's essential to manage the inherited IRA separately. Your RMD calculation is based on your life expectancy.

Here's a brief overview of the RMD calculation process:

If you're not subject to RMDs, you'll need to empty the IRA balance within 10 years, starting the year after the original account owner's death. This distribution period can be a challenge, but with proper planning, you can navigate it successfully.

To open an inherited IRA, you'll need a death certificate to verify the account owner's passing. This document is essential for the transfer process.

You'll also need to fill out an inherited IRA account application. This will provide the necessary information for the new account.

Relevant paperwork verifying your beneficiary designation is crucial to ensure the transfer is done correctly. This may include documentation showing you as the beneficiary of the account.

The title of the account, which includes both your name as beneficiary and the deceased's name as the original account holder, should be readily available.

As a surviving spouse, you have several options when it comes to managing the inherited IRA. You can roll over the funds into your own IRA, which allows you to delay taking required minimum distributions (RMDs) until you reach age 73.

You can also choose to treat the IRA as if it were your own, which means you can take RMDs based on your own age. However, if the original account holder had already begun taking RMDs, you must continue to receive distributions as calculated or submit a new schedule based on your own life expectancy.

One of the biggest advantages of rolling over the IRA is that it allows you to delay taking RMDs until you reach age 73. This can be beneficial if you're not yet 59½, as you won't be subject to the 10% early withdrawal penalty. However, if you're under 59½, you'll still be subject to the same distribution rules as if the IRA had been yours originally.

If the original account holder had already reached their required beginning date to start taking RMDs (age 73 and over), you must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder's death.

Here are some key options to consider:

Ultimately, the best option for you will depend on your individual circumstances and goals. It's a good idea to consult with a financial advisor or tax professional to determine the best course of action for your situation.

As a non-spouse beneficiary, you have several options for managing the inherited IRA. You can take a lump-sum distribution, which is taxable to you, or transfer the funds into an Inherited IRA in your name. If the original account owner passed away before December 31, 2019, the required minimum distribution (RMD) will be based on your age using the single life expectancy factor.

You can also disclaim the proceeds, transferring full rights to remaining beneficiaries or the decedent's estate. Alternatively, you can transfer the inherited funds into your own Inherited IRA, which will allow you to delay taxes on the distributions. Keep in mind that if you have a minor child as a beneficiary, you may need to switch from the life expectancy method to the 10-year method when the child turns 21.

Here are some key options to consider:

In some cases, you may be eligible for special rules, such as the 10-year rule, which allows you to delay distributions for up to 10 years. This rule applies if you are a minor child, chronically ill or disabled, or not more than 10 years younger than the original account owner.

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As a non-spouse beneficiary, you have several options for managing the inherited IRA. You can take a lump-sum distribution, which is taxable to you, or transfer the funds into an Inherited IRA in your name.

If the original account owner passed away before December 31, 2019, your required minimum distribution (RMD) will be based on your age using the single life expectancy factor. However, if the original owner passed away on or after January 1, 2020, the proceeds will be paid out within 10 years from the original owner's date of death, unless you're a minor child, disabled or chronically-ill person, or a beneficiary no more than 10 years younger than the deceased.

You can also choose to roll over the assets to a new Inherited IRA, which will allow you to stretch out the distributions over your lifetime. This can be beneficial if you're not in a high tax bracket or if you want to delay taking distributions.

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Here are some key points to keep in mind:

It's essential to note that if you're a minor child, the life expectancy method of distribution is no longer available when you turn age 21. At that point, the distribution option is required to switch to the 10-year method, and all remaining assets need to be distributed by the end of the 10th year after you turn 21.

When dealing with non-individual beneficiaries, such as estates or charities, there are specific rules to follow.

If the original IRA owner was required to take RMDs at the time of their death, then RMD distributions are required based on the single life expectancy of the original IRA owner.

For example, let's say your grandfather passed away and left his IRA to his favorite charity. If he was already taking RMDs, the charity would need to follow the same distribution schedule based on his single life expectancy.

If the original IRA owner had not yet reached the required beginning date for RMDs at the time of their death, then the 5-year rule applies. This means all assets must be fully distributed by the end of the fifth year after the original IRA owner's year of death.

Here are the key rules to keep in mind: