Inherited IRA for Minors Distribution Rules Explained

If a minor inherits an IRA, the distribution rules are a bit more complicated than usual. The minor's age determines the distribution options available.

Typically, the IRA custodian will hold the funds in a custodial account until the minor reaches the age of majority, which is 18 or 21 depending on the state.

For example, in some states, the age of majority is 18, while in others it's 21.

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If you're a minor inheriting an IRA, you have some special rules to follow. You can take distributions based on your life expectancy until you reach age 21.

As a minor, you're not subject to the 10-year rule, which means you don't have to deplete the account within a decade. This gives you more flexibility with your inheritance.

If you're a minor inheriting an IRA, you can roll over the assets into a new IRA in your name, but you can't roll them into an existing IRA. You'll need to set up a new account specifically for the inherited assets.

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You can also take a lump-sum distribution, but this might not be the best option, as it could lead to higher taxes. It's essential to consult with a tax professional before making any decisions.

Here's a summary of your options as a minor inheriting an IRA:

Remember, it's crucial to consult with a financial advisor or tax professional to determine the best course of action for your specific situation.

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The changes and penalties surrounding inherited IRA distributions can be overwhelming, especially for minors. The IRS has delayed implementation of final rules governing inherited IRA RMDs until 2025, giving some beneficiaries more time to adapt.

Inherited IRAs are generally subject to required minimum distributions, which can vary depending on the beneficiary's relationship to the original account owner. The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs.

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If you're a minor inheriting an IRA, you can take distributions based on your life expectancy until you reach age 21. This is a more favorable option than the 10-year rule, which applies to most non-spouse beneficiaries.

The 10-year rule has raised concerns about annual RMDs for unsuspecting beneficiaries. To avoid penalties, it's essential to understand the rules and consult with a trusted tax advisor to determine how to time your distributions strategically.

Here are the main categories of "eligible designated beneficiaries" (EDBs) that benefit from more flexibility in how they withdraw funds from an inherited IRA:

It's essential to note that individual circumstances vary, so consult with a trusted tax advisor to determine how to navigate the complexities of inherited IRA distributions.

The year the account owner died is a crucial factor in calculating the inherited IRA RMD. Unless the account owner already took their RMD for this year, you can calculate your distribution by following these steps.

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To calculate the distribution, find the IRA's balance on Dec. 31 of the previous year. This is a critical number that will help you determine how much you need to take out.

Next, find the distribution period from Table III for the account owner's age on their birthday this year. This table is a key resource for determining the correct distribution period.

Divide the IRA's balance on Dec. 31 of the previous year by the distribution period to get your RMD. This calculation will give you a clear picture of how much you need to take out.

For the years after the account owner's death, the rules can get a bit more complicated. If the account holder died in 2020 or later, a spouse may have several options, including rolling over the account owner's IRA into their own account.

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The tax implications of inheriting an IRA for minors can be complex, but understanding the rules can help you navigate the process smoothly.

The IRS requires that the custodian of the IRA must report the distribution on the minor's tax return, even if the minor doesn't have to file a tax return.

The custodian can report the distribution on a Form 1099-R, which will be sent to the minor and the IRS.

The distribution will be taxed as ordinary income to the minor, and may be subject to a 10% penalty if the minor is under age 18.

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The SECURE Act of 2019 changed the inherited IRA rules, making it more complex for non-spouse beneficiaries. Starting with those who inherited after January 1, 2020, the entire balance of the participant's inherited IRA account must be distributed or withdrawn by the end of the 10th year following the original owner's death.

Exceptions to the 10-year rule include inheriting from a spouse, being a minor child, being chronically ill or disabled, or not being more than 10 years younger than the account owner. If you inherited an IRA from someone who died before December 31, 2019, the 10-year rule does not apply.

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The 10-year rule applies regardless of whether the participant dies before, on, or after the required beginning date (RBD), the age at which they had to begin RMDs. This means you must withdraw the inherited funds within 10 years and pay income taxes on the distributed amounts.

Here are some key dates to keep in mind:

Remember, it's essential to understand your specific situation and the rules that apply to your inherited IRA.