Inheriting an IRA? Basic rules explained. Add me on Insta: michellemarki

The Great Wealth Transfer means that millions of Millennials and Gen Xers could stand to inherit $30 trillion to $68 trillion from Baby Boomers in the coming decades.

For fellow Millennials, this could mean that we go from collectively owning $4.5 trillion in 2018 to $20 trillion by 2030 — or a compounded annual return rate of 13.3%. This impressive rate reflects both our own savings and investing rates, as well as what we might inherit.

However, it is sad and difficult when our elders pass on. And then it’s made when worse when the situation of inheriting Individual Retirement Accounts (IRA) such as a Traditional IRA, 401k, or Roth IRA is confusing and complicated because of current interpretations of the rules.

As of 2022, the IRS has been working on making some final interpretations of the SECURE Act of 2019 that took effect in 2020 for inherited retirement accounts.

I’m sharing what I’ve learned so far but I am no authority on this subject so please consult with a professional for your specific situation.

In the previous rule, people who inherited IRAs could spread out or stretch out their withdrawals (distributions) throughout their lifetime aka the beneficiary’s life expectancy.

The SECURE Act changed this by introducing the 10 Year Rule, and this new rule affects many beneficiaries. The 10 Year Rule means that some beneficiaries will have to distribute all of the original IRA owner’s funds by the end of the 10th year following the original IRA owner’s death.

Based on the IRS’s February 2022 guidance on Publication 590B, in some circumstances you may need to make annual distributions from the inherited IRA in that most likely you cannot wait until the 10th year to start withdrawing the funds.

Because of this obligation, some people might choose to do a lump sum distribution in the first year, get taxed, and be done with it.

As an example, an adult child (a “designated beneficiary”) is inheriting an IRA of a parent who passed away in Summer 2022. This beneficiary has until December 31, 2032 by which to withdraw all of the funds of their parent’s IRA.

And if this parent was 72+ at the time of their passing, then most likely they had Required Minimum Distributions (RMD) on their Traditional IRA or 401k that are supposed to happen so now the heir must continue those RMDs every year. RMDs don’t apply to Roth IRAs so you may not have to withdraw from this type of account every year.

Designated beneficiaries include: adult children, grandchildren, siblings, or friends have to comply with the 10 Year Rule as it stands.

In contrast, an eligible designated beneficiary is a special group that has more options for inheriting IRAs. They include: the original owner’s spouse, minor child, chronically ill, or permanently disabled person.

The eligible designated beneficiaries still have the ability to withdraw the funds throughout their life expectancy (to an extent for the minor child until they reach the age of majority of 21 per IRS tax rules). In the video, I share an example of a minor child inheriting a parent’s IRA and how they may need to expedite withdrawals after age 21.

Spouses have some of the most flexible inheritance options where they can choose to treat the deceased spouse’s IRA as their own in doing a spousal transfer. They can also do the life expectancy method, 10 year method, and lump sum distribution. I discuss the inheritance options for other non-spouse types of beneficiaries.

I hope you found my explanation of the basic rules of inheriting an IRA helpful. Let me know your questions so I can help us both improve our understanding of what’s going on with inheriting IRAs. Stay tuned to the IRS for any changes with these inheritance rules.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide:

I look forward to making more investor friends! Please like and subscribe if you learned something or enjoyed my video. Thank you! 🙂

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Disclaimers: This content is for entertainment, information, education purposes only. Michelle is not a financial advisor and is not providing financial, investment, trading, tax advice, or recommendations. Please consult with a professional financial advisor with a fiduciary duty and responsibility if you need help in your situation. All trademarks, logos, and brand names belong to their respective owners….(read more)

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The Great Wealth Transfer is upon us. As the Baby Boomers age and pass away, they are leaving behind a considerable amount of wealth. Many of these estates will include an Inherited IRA, which is a special type of retirement account that is passed on to the next generation. While these accounts can be a great source of financial security for the heirs, there are some important rules that must be followed in order to ensure that the account is managed properly.

First and foremost, it is important to understand that the Inherited IRA is not the same as a traditional IRA. The account is not subject to the same contribution limits and cannot be rolled over into another retirement account. Instead, the account must be managed according to the rules set forth by the Internal Revenue Service.

One of the most important rules to understand is the required minimum distribution (RMD). This rule requires that the beneficiary take a certain amount out of the account each year, based on their age and the size of the account. Failure to take the RMD could result in significant penalties.

Another important rule to understand is the beneficiary designation. This is the person who will receive the funds from the Inherited IRA when the account holder passes away. It is important to ensure that the beneficiary designation is up to date, as any changes made after the account holder’s death may not be honored.

Finally, it is important to understand the tax implications of an Inherited IRA. Generally, the beneficiary will be responsible for paying taxes on any withdrawals from the account. It is important to consult with a tax professional to ensure that the appropriate amount of taxes are paid.

Inherited IRAs can be a great source of financial security for the next generation. However, it is important to understand the rules that govern these accounts. By taking the time to understand these rules, the beneficiary can ensure that the account is managed properly and that their financial future is secure.