IRA Financial’s Adam Bergman discusses the Inherited IRA and your options as either a spouse or non-spouse.
In his latest podcast, Mr. Bergman talks about the Inherited IRA. He discusses your options as the beneficiary. Further, he explains the difference between a spousal and non-spousal beneficiary. Plus, he will discus if you leave your IRA to a trust. Also, he will explain the differences between a traditional and Roth IRA inheritance. Lastly, he discusses your options when you inherit an IRA.
What is an Inherited IRA?
When a loved one passes away, his or her assets will pass to the beneficiaries he or she has named. Assets may include a house, collectibles, investments and retirement plans. If you are named the beneficiary of an IRA, it is often referred to as an Inherited IRA. Losing a loved one is a very hard thing to deal with. However, you must take care of all the things that come with the death of someone dear. One of those things is dealing with the financials.
There are clear rules set forth by the IRS that deals with Inherited IRAs. However, these rules can vary depending on your relationship to the deceased and also what type of IRA you were left. Next, we will talk about the difference between a Spousal and Non-Spousal Inherited IRA.
Spousal vs Non-Spousal Inherited IRA
A significant majority of Inherited IRAs come from a departed spouse. The rules for this type are pretty cut and dried. Generally, the spousal beneficiary will assume the IRA as his or her own and follow the usual rules for an IRA. The only tricky part is navigating the Required Minimum Distribution (RMD) rules. If both the deceased and the beneficiary were under age 70 1/2, the beneficiary can wait until they turn 70 1/2 to begin RMDs. He or she may also choose to use the IRA owner’s age to determine when to start taking RMDs. Lastly, you can follow the five year rule and distribute the entire IRA within five years. If the original owner had already reached the required beginning date, the beneficiary can still assume the IRA as his or her own. Further, you can take distributions based on your, or the original owner’s age.
Non-spousal Inherited IRAs do not have as many options. Non-spousal beneficiaries include children, siblings, aunt, uncles and friends. If the original IRA owner was already age 70 1/2, you must begin RMDs based on your age or the original owner’s age, whichever is younger. If he or she was not yet 70 1/2, you have two options. You can choose to follow the five year rule as mentioned above or take distribution based on your age at the time of death.
If you are a trust that has inherited the IRA, you must either make distributions based on the decedent’s age or follow the five-year rule. You can check out the IRS website for a table that lists the options.
What if You Inherit a Roth IRA?
A Roth IRA is one of the best retirement plans available to you. They are funded with after-tax money and all qualified distributions are tax-free! This goes for Roth IRA beneficiaries as well. A qualified distribution can occur so long as the Roth has been open for five years and you are at least 59 1/2 years of age. Again, there are slightly different rules for spouses and non-spouses.
Again, spouses can transfer the Roth to an account in his or her name. You’ll follow the usual rules of a Roth IRA, as if the plan was yours all along. Secondly, you can open an Inherited IRA. You will be required to take distributions either the year following the year of death, or when the original owner would have turned 70 1/2. You may also choose the five year method. Annual distributions are not mandatory, but you must withdraw all funds within five years. Finally, you may choose to take a lump sum distribution. Earnings may be taxed if the account wasn’t open for at least five years.
Non-spouses can choose to open an Inherited Roth IRA. RMDs must commence before December 31of the year following the year of death. You may also choose the five year method mentioned above. Lastly, you may also choose to take a lump sum as well. While RMDs are required, distribution will generally be tax-free.
The Stretch IRA
Once last thing Mr Bergman talks about is the Stretch IRA. This is a popular estate planning tool that many people utilize. Essentially, it’s a term that describes the benefit of the Inherited IRA. An IRA can be passed along from one generation to the next. Because of this, the tax-advantages will last for decades.
It’s important to note that legislation may soon change the advantages of the Stretch IRA. Bills that are currently being discussed, the SECURE Act and RESA Act, may look to limit the time-frame of an Inherited IRA. They want to limit an Inherited IRA to either five or ten years. This means a younger beneficiary won’t have decades to receive the benefits of the IRA. The account must be fully withdrawn, which will limit the attractiveness of the Stretch.
An Inherited IRA has it’s pros and cons. Obviously, if you inherited an IRA, someone close to you has passed. While nothing can change that, you make take solace in the fact that he or she left you a wonderful gift. However, you must make sure you know the rules if you are the beneficiary. A custodian or plan administrator, such as IRA Financial, can make sure you have one less thing to worry about during this difficult time.
If you have any questions about the Inherited IRA, please give us a call at 800.472.0646. As always, thanks for listening/watching and be sure to check out our older podcasts on our SoundCloud page!