Contributed by: Kali Hassinger, CFP®, CSRIC®
Receiving an inheritance can be confusing and filled with mixed emotions. However, when inheriting a traditional IRA, the confusion can be compounded by the multitude of rules, regulations, and tax implications surrounding these accounts. How you manage the account in the future can depend on several factors, such as your relationship with the deceased and the age of the deceased at death.
You've Inherited an IRA from your Spouse
If you inherited an IRA from your spouse, and you are the sole beneficiary, you have several options on how to manage the account in the future. The first option is to simply allow the account to remain in your deceased spouse's name. In this example, if your spouse hadn't yet reached RMD or Required Beginning Date age (as of right now, this is age 73, but it has changed several times in the last few years), you wouldn't need to begin taking Required Minimum Distributions (RMDs) until your spouse would have reached age 73. With this process, you will have additional elections to make regarding which life expectancy table will be used to determine your RMDs.
Spouses can also transfer the account assets into their own traditional IRA. This option is specific to spouses only. With this election, the account is treated no differently than an IRA established in your name. Required Minimum Distributions would not begin until your RMD age.
However, if you want to access the funds earlier than 59.5 without a 10% tax penalty, it could make more sense to open a beneficiary IRA. This account will be subject to annual required distributions, but again, without a tax penalty.
You've Inherited an IRA from Someone Else
If you recently (since 2020) inherited an IRA from someone else, such as a parent, aunt, or uncle, and as long as they were more than ten years older than you, you will likely need to open an inherited IRA and distribute the entire account within ten years!
If the deceased was subject to Required Minimum Distributions before their death, you must also take an RMD each year (Note: This requirement has been waived in recent years but is set to begin in 2025.) Given that traditional IRA withdrawals, whether inherited or not, are subject to ordinary income tax, this can create significant tax implications for beneficiaries. Purposeful tax planning is essential to avoid unforeseen or forced distributions in later years.
The options discussed here are certainly not exhaustive, and rules differ for beneficiaries who are disabled, chronically ill, minors, or entities (as opposed to individuals). These differing rules also apply to instances in which the beneficiary is less than ten years younger than the deceased account holder.
If you've inherited an IRA and are looking for guidance on which option or planning path is best for you, we are here to help.
Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.