Inheriting an IRA From a Parent or Other Non-Spouse
When you inherit an IRA from someone other than your spouse, you have two options:
- transfer the inherited IRA to an Inherited IRA Beneficiary Distribution Account
- disclaim all or part of your portion of the inherited IRA.
If you opt to transfer your inherited assets to a beneficiary IRA, you can begin making the minimum required distributions by December 31 of the year following the IRA owner’s death. Your minimum required distributions are based on your life expectancy or the five-year rule depending on whether or not you are a designated beneficiary. If you share the inheritance with others, each must set up his/her own account for his/her portion of the inheritance within a specified time frame following the owner’s date of death. The distribution rules for the beneficiary are slightly different if the owner of an IRA dies before reaching age 70 ½ than if he or she dies after reaching that age.
If an IRA owner dies before age 70 ½ or has not started withdrawing the minimum distributions, those inheriting the IRA must follow either the one year rule or the five year rule.
- One year rule: If the beneficiary is the designated beneficiary, distributions must begin by December 31st of the year following the owner’s death. Distribution withdrawals are based on the beneficiary’s life expectancy.
- Five year rule: The beneficiary must receive the full interest in the inherited IRA by the end of the fifth year following the owner’s death. There are no minimum annual distributions required with the five year rule.
These rules are complicated and should be discussed with a professional.
If you opt to disclaim all or part of your inherited assets, you must do this within nine months of the IRA owner’s death. Once you disclaim your assets, they will pass to the next eligible beneficiaries. Once you disclaim the inheritance, it would be passed on to the next eligible beneficiaries. A disclaimer is irrevocable so you should consult with a tax attorney before taking this step.
Inheriting an IRA From a Spouse
If you inherit an IRA from your spouse, you can treat is as your own. This means the contributions can be made to the IRA and you can roll it over. You are free to designate your own beneficiaries and usually will not owe tax until you start receiving distributions.
If you inherit an IRA from your spouse, you also have the option to begin receiving distributions. These distributions can begin on the later of the date on which the owner would have reached 70 ½ or by December 31 of the calendar year following the year in which the owner died.