Unlike your own personal IRA or retirement account, inherited IRAs have special rules that apply. Beneficiaries other than the spouse of the IRA owner (also known as non-spouse beneficiaries) have special rules that apply which many people are unaware of.
Rule #1 – Non-Spouse Beneficiaries Can Move the Inherited IRA
As the beneficiary of an IRA, you have the option to move the inherited IRA to another custodian of your choice. Typically, however, you are required to move the account by direct transfer to an inherited IRA account. You are not able to take a distribution and roll it over within 60 days the way a spousal beneficiary is able to. You also have the right to select different investment options for your inherited IRA.
Rule #2 – Non-Spouse Beneficiaries Cannot Contribute to the Inherited IRA
You are not able to make contributions to an inherited IRA or combine your own personal IRA and an inherited IRA account.
Rule #3 – Non-Spouse Beneficiaries Cannot Convert the Inherited IRA to a Roth IRA
Many times individuals prefer Roth IRAs, which are taxed now so that future distributions are tax-free. The inherited IRA rules do not allow for a non-spouse beneficiary to convert inherited IRAs to Roth IRAs.
Rule #4 – Non-Spouse Beneficiaries May Be Subject to Annual Required Distributions from the Inherited IRA
The funds inside an inherited IRA cannot hang onto the funds indefinitely. After the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, non-spouse beneficiaries are subject to a 10-year payout period, possibly with annual required distributions during the 10-year period. There are certain eligible designated beneficiaries who inherited prior to 2020 that may be able to stretch RMDs over their own life expectancy. A qualified professional can assist and determine if you must take distributions.
Rule #5 – Non-Spouse Beneficiaries May Be Able to Take Advantage of a Qualified Charitable Distribution
Individuals over the age 70 ½ qualify for what is known as a qualified charitable deduction (or “QCD”). This allows an individual to move up to $100,000 tax-free each year from the IRA directly to a charity of your choosing.
Rule #6 – Distributions to a Non-Spouse Beneficiary May Be Taxable
An inherited traditional IRA is likely to require distributions to be taxed. For inherited Roth IRAs, distributions are most likely tax-free. However, inherited IRAs are never subject to the early distribution penalty (currently set at 10%).
In closing, if you or someone you know is in the Antelope and Santa Clarita Valleys and North Los Angeles County area and have recently inherited an IRA and you are unsure as to what rules you are to follow and how to properly manage your inherited IRA, this is an area that we may be able assist you.
Attend a very special free seminar on the SECURE Act and Retirement Planning on Friday, December 16th at 10am. Space is limited and reserve your spot today by calling our office at 661-945-5868.