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Inherited IRA Explained

An inherited IRA is an individual retirement account (IRA) that is opened when someone inherits an IRA or employer-sponsored retirement plan after the original owner's death. The beneficiary of an inherited IRA cannot make contributions to the account, but they can take withdrawals from the account

Spouse beneficiaries. Spouses of IRA owners have the most flexibility when it comes to inherited IRAs. They can choose to treat the IRA as their own, in which case they will be subject to the same distribution rules as the original owner. This means they can take withdrawals as needed, without having to take required minimum distributions (RMDs). Or, they can choose to keep the IRA in their own name as an inherited IRA, in which case they will be subject to the 10-year rule.

Non-spouse beneficiaries. Non-spouse beneficiaries must take required minimum distributions (RMDs) from an inherited IRA, unless they are one of the following exceptions:

  • A minor child of the original IRA owner.
  • A disabled or chronically ill beneficiary.
  • A beneficiary who is not more than 10 years younger than the original IRA owner.
  • If a non-spouse beneficiary is not an exception to the 10-year rule, they must withdraw the entire balance of the inherited IRA within 10 years of the original owner's death. The RMDs must be calculated using the beneficiary's life expectancy.
  • Inherited IRAs created before 2020. The 10-year rule for inherited IRAs did not apply to IRAs created before 2020. However, if the original IRA owner died after 2019, the 10-year rule will apply to the inherited IRA, even if it was created before 2020.

It is important to note that these are just the general rules for inherited IRAs. There are some other factors that may affect the distribution rules, such as the type of IRA (traditional or Roth) and whether the original IRA owner had begun taking RMDs. It is always best to consult with a financial advisor to determine the specific distribution rules that apply to your situation.

Here are some additional things to keep in mind about inherited IRAs:

  • The beneficiary must keep the inherited IRA in a separate account from their own IRA's
  • The beneficiary cannot roll the inherited IRA into their own IRA.
  • The beneficiary cannot make contributions to an inherited IRA.
  • The beneficiary is responsible for paying taxes on the earnings of the inherited IRA.
  • If you are a beneficiary of an inherited IRA, it is important to understand the distribution rules so that you can make the best decisions for your financial situation.

Contact Jon or Shawn for more information!