TLDR;
This document outlines the key considerations for inherited IRAs, focusing on tax implications and distribution rules for different types of beneficiaries. It highlights the tax advantages of inherited Roth IRAs, the options available to surviving spouses, and the accelerated distribution timelines for non-eligible designated beneficiaries like children.
- Withdrawals from inherited traditional IRAs are taxed at the beneficiary’s ordinary income rate.
- Inherited Roth IRAs generally allow tax-free qualified withdrawals if the five-year holding requirement is met.
- Spouses can treat an inherited IRA as their own or roll it into their own IRA, delaying required minimum distributions (RMDs).
- Non-eligible designated beneficiaries, such as children, must withdraw the entire inherited IRA within 10 years.
Inherited Traditional IRAs: Taxation
Withdrawals from inherited traditional IRAs are generally taxed at the beneficiary’s ordinary income rate. This means that the money you take out will be added to your taxable income and taxed accordingly.
Inherited Roth IRAs: Taxation
With an inherited Roth IRA, the beneficiary generally does not pay income tax on qualified withdrawals, provided the account has met the five-year holding requirement. This can be a significant advantage, as it allows the beneficiary to receive the assets tax-free.
Spousal Options for Inherited IRAs
Spouses have the option to treat the decedent’s IRA as their own or roll it into one of their own existing IRAs. By doing so, they don’t need to take any RMDs from the account until their own required beginning date, which is generally April 1 of the year following the year they reach age 73 (increasing to 75 in 2033).
Distribution Rules for Non-Eligible Designated Beneficiaries
New rules have accelerated the time frame most people need to take distributions. Children who are not eligible designated beneficiaries must withdraw the entire inherited IRA within 10 years. This can have significant tax implications, as the beneficiary may be forced to take large distributions in a short period of time.
