IRAs Inherited By Persons Other than a Spouse

By | February 24, 2015

The IRS rules for inherited IRAs by someone who is not the spouse can be difficult and no the most intuitive to understand. However, it is absolutely essential to get these rules right because the penalties on mistakes can be huge. The rules governing inherited IRAs differ from the rules that govern IRAs bequested to a surviving spouse. If a beneficiary is not the owner’s surviving spouse, the IRA is treated as an inherited IRA.


Required Distributions from Inherited IRAs

You generally will not have to pay federal income tax on the assets in the inherited IRA until you begin receiving distributions from the account. All inherited IRAs – whether a traditional or Roth IRA – are subject to annual required minimum distribution rules. In general, beneficiaries of inherited IRAs must receive required distributions over their life expectancy or within five years after the original IRA owner’s death. The rules for inherited IRA depend heavily in part on whether the original IRA owner died before the date on which he or she was required to begin taking distributions from the IRA.


When do you take distribution from Inherited IRA

When an IRA owner dies before the date on which he or she is required to begin taking annual distributions from the traditional IRA, the entire IRA must generally be distributed in accordance with either the five-year rule, which requires that the entire interest be distributed within five years of the original owner’s death, or the life expectancy rule. If the individual for whom the IRA was maintained dies on or after his or her required beginning date, the remaining assets in the IRA must be distributed at least as rapidly as under the method of distribution being used as of the date of death


Taxing Inherited IRA

Distributions from inherited IRAs are taxable to the beneficiary as ordinary income. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. If they do not withdraw a required distribution amount in any tax year, the amount is still subject to federal income tax but also is subject to a 10 percent penalty.


Inherited Roth IRAs from Non-Spouse

For inherited Roth IRAs, all funds must be withdrawn within five years of inheriting the account. Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary.Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.