If you already have an IRA, you can transfer the inherited assets to another traditional IRA in your name or convert the assets to a Roth IRA. The easiest way to do this is with a direct transfer from trustee to trustee from one account to the other, or between one IRA custodian and another. Beneficiaries of an IRA and most plans have the option to pay out the inheritance account in a lump sum at any time. Beneficiaries must include any taxable distributions they receive in their gross income.
Withdrawals you make (sooner or when it’s time to accept distributions) are taxed at your regular income tax rate for traditional IRAs and SEP IRAs. It’s also important to note that although the original owner of a Roth IRA is not required to take out an RMD over the course of their life, beneficiaries who inherit a Roth IRA must take an RMD to avoid penalties. Regardless of whether a spouse or non-spouse is named as the beneficiary of an individual retirement account (IRA) when the IRA owner dies, current tax law allows the inheritance or the total amount in the account to be accepted tax-free. However, the fact that the Roth IRA reduces the tax impact on heirs could make it easier to decide what to do with the money.
The IRS offers more rules for your options, including what you can do with a Roth IRA, where the rules differ significantly from traditional IRAs. Onge, a registered agent with Total Financial Planning, LLC in the Detroit area, when he spoke about IRAs inherited from a spouse. A bit more administrative effort is required if you’re not a spouse who inherits an IRA (alone or when left to multiple people), or if you’re a spouse who isn’t the sole beneficiary. These beneficiaries are not required to use up the IRA within 10 years and are likely to deduct annual RMD from it, although the exact amount can be calculated based on their life expectancy.
Surviving spouses can analyze the account and transfer some of it to their own IRA and leave the remaining balance in the inherited account. If the spouses choose to transfer, the spouses have 60 days from receipt of the inherited distribution to transfer it to their own IRA, unless the distribution is a required minimum distribution. As you can see, you may need to start withdrawing the money from an IRA that someone left you right away rather than when you retire. So your next step is to contact your IRA custodian bank, who will get more detailed information about your plan and how to proceed.
For example, if you are the sole beneficiary as a surviving spouse and treat the IRA as your own, you may need to claim RMDs, depending on your age, or you may need to withdraw the money in full within 10 years. In general, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. The IRS has a minimum amount that account holders must withdraw each year from an IRA and defined contribution plans (such as 401 (k) plans). Some experts advise IRA beneficiaries not to do anything until they’ve met with a financial advisor who can explain their options.
