Anyone can inherit an IRA, but inherited IRAs are subject to special rules. Following the death of an IRA owner, the IRA usually passes to a beneficiary. Required minimum distributions generally apply once an IRA account owner dies. This applies to Roth and traditional IRAs. In this webinar, we cover distributions from inherited IRAs.

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Inheriting an Individual retirement account (IRA) can be a bittersweet experience. On one hand, it can provide a financial cushion for the future, but on the other hand, it can come with confusing rules and requirements. One important aspect to consider when inheriting an IRA is how distributions from the account will be treated.

When it comes to inherited IRAs, there are specific rules that dictate how distributions can be taken. The treatment of these distributions depends on several factors, such as the age of the original account holder at the time of their passing, the relationship of the beneficiary to the deceased, and whether the IRA is a traditional or Roth account.

If the original account holder was under the age of 70 ½ at the time of their passing, the beneficiary has several options for taking distributions from the inherited IRA. One option is to take distributions over their own life expectancy, known as the stretch option. This allows the beneficiary to “stretch” out the distributions over many years, potentially minimizing the tax burden.

Another option is to take a lump-sum distribution of the entire account balance. While this may be appealing for those in need of immediate funds, it can also result in a hefty tax bill, as the entire amount withdrawn is considered taxable income.

For beneficiaries who are spouses of the original account holder, there is an additional option available. They can choose to treat the inherited IRA as their own, either by rolling it over into their own existing IRA or by designating themselves as the account holder. This allows the spouse to continue making contributions and taking distributions based on their own age and circumstances.

For beneficiaries who are not spouses of the original account holder, the rules are a bit different. They are required to start taking distributions from the inherited IRA by the end of the year following the original account holder’s passing. The amount of the required minimum distribution (RMD) is based on the beneficiary’s life expectancy and the account balance.

It’s important for beneficiaries to understand the rules and options available to them when inheriting an IRA, as the treatment of distributions can have a significant impact on their financial future. Consulting with a financial advisor or tax professional can help ensure that the best strategy is chosen based on individual circumstances.

In conclusion, the treatment of distributions from inherited IRAs can vary depending on several factors, including the age of the original account holder, the relationship of the beneficiary, and the type of IRA. Understanding the options available and seeking guidance from professionals can help beneficiaries make informed decisions that align with their financial goals.