Here are 7 surprising rules for when you inherit an IRA from someone other than your spouse.

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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)

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Inheriting an Individual retirement account (IRA) from a non-spouse can be a complex process with a variety of rules that need to be followed in order to avoid costly mistakes. Whether you are inheriting an IRA from a parent, sibling, or other family member or friend, it is important to understand the rules that come with this type of inheritance.

First and foremost, it is important to know that non-spouse beneficiaries of an IRA have different options available to them than spouses do. Non-spouse beneficiaries can choose to take a lump sum distribution of the entire IRA, which will result in the account being fully taxed in the year the distribution is received. Alternatively, non-spouse beneficiaries can choose to take distributions over a period of time, known as a stretch IRA, which allows the funds to grow tax-deferred over time.

When inheriting an IRA from a non-spouse, it is important to note that there are required minimum distributions (RMDs) that must be taken each year, starting either the year following the original account owner’s death or by December 31 of the year following the original account owner’s death, depending on the age of the original account owner. These distributions are based on the life expectancy of the beneficiary and must be taken each year in order to avoid penalties from the IRS.

It is also important to know that non-spouse beneficiaries are not allowed to contribute additional funds to an inherited IRA. Additionally, if multiple beneficiaries inherit an IRA, each beneficiary’s RMD will be based on their own life expectancy, not the life expectancy of the oldest beneficiary.

Another important rule to keep in mind when inheriting an IRA from a non-spouse is that inherited IRAs are not protected from creditors in the same way that personally-owned IRAs are. This means that if a beneficiary were to face bankruptcy or other financial difficulties, the funds in an inherited IRA could be at risk.

In conclusion, inheriting an IRA from a non-spouse comes with its own set of rules and considerations that must be carefully navigated. It is important to work with a financial advisor or tax professional to ensure that you are following all of the necessary rules and guidelines in order to maximize the benefits of your inherited IRA. By understanding the rules and options available to you as a non-spouse beneficiary, you can make informed decisions that will help you make the most of your inheritance.