What Recipients of Inherited IRAs Need to Learn About Their Tax Choices

A loved one or family member may leave behind an inherited IRAs when they pass away. You could receive an inherited traditional IRA or an inherited Roth IRA as the beneficiary.

Various timelines impact beneficiaries. Additionally, there are guidelines for how beneficiaries should handle an inherited traditional or Roth IRA. The tax choices open to inheritors of IRAs are below.

An Inherited IRA: What Is It?

A retirement account that is left to an inheritor after death is an inherited IRA. However, you may regard someone else’s IRA as your own or you may be the beneficiary of an IRA depending on your relationship with the original IRA owner.

Any IRA type can be opened by beneficiaries for inherited accounts. However, there are restrictions on how you can utilize and transfer funds as the beneficiary of an inherited IRA.

How Do Inherited IRAs Operate?

A recipient of an inherited IRA may handle the account as their own or transfer IRA.

You won’t be able to add more money to an inherited IRA as a beneficiary. Instead, the original owner of the inherited IRA must transfer the assets to the beneficiary. Even if the distribution amount is a lump sum, this transfer is still necessary.

Use IRS Forms 1099-R and 5498 to record the earnings from an inherited IRA as well as any distributions that were made.

Who May Be an Inherited IRA Beneficiary?

An inherited IRA can have any person as the beneficiary. Beneficiaries of an inherited IRA may be entities, spouses, family, or unconnected third parties.

Spouses and those not married can both get an inherited IRA. Furthermore, there are two subcategories of non-spouse beneficiaries, namely eligible designated beneficiaries and designated beneficiaries.

The people who are beneficiaries are those who don’t qualify for any exemptions. Defined beneficiaries who are eligible include:

  • Persistently unwell
  • Younger than the original account holder by fewer than ten years
  • Young children (the 10-year rule will begin at age 18)
  • A lifelong disability
  • Surviving partner

Rules for Inherited IRAs

An inherited IRA might have two effects on the inheritors. Whether you use an inherited Roth IRA or an inherited traditional IRA, the withdrawal regulations for inherited IRAs vary. Whether the beneficiary is a spouse or a non-spouse also affects the requirements.

Heirloom Roth IRA

How you can use an inherited Roth IRA is governed by two rules. How you use an inherited Roth IRA will depend on your relationship with the original IRA owner.

As the former spouse’s sole beneficiary and the recipient of an inherited Roth IRA, you have three choices:

  • Convert the inherited Roth IRA to your personal Roth IRA.
  • As a retirement account, keep it growing.

Choose the surviving spouse’s strategy, which uses life expectancy. By selecting this approach, you’ll distribute monthly payments throughout the courtesan. The money will increase tax-free.

If you are the non-spouse beneficiary of an inherited Roth IRA, the requirements may be different. Whether you are a designated beneficiary or an eligible designated beneficiary will depend on your status.

Within ten years of the original Roth IRA owner’s passing, non-spouse beneficiaries must withdraw the funds from their inherited Roth IRA account. There are certain exceptions to this rule, including those who are qualified beneficiaries.

Traditional IRA inheritance

The specific guidelines you’ll adhere to if you inherit a traditional IRA will rely on your relationship with your relative or spouse.

You have three possibilities for using your inherited IRA as the surviving spouse. By naming yourself as the account owner, you can regard it as Your IRA.

If it is taxable, roll it over into your quad employer plan, qualified worker annuity plan, tax-sheltered annuity plan, or deferred compensation plan of a state or local government. Or, if it is your own, roll it over into a regular IRA.

Instead of Thinking of the IRA as Being Your Own, Think of Yourself as the Beneficiary

Following a distribution, you’ll have 60 days to roll over your inherited IRA. If the distribution is not a needed minimum distribution, then this rule does not apply. The following are the mandatory minimum distributions under the final regulations for inherited traditional IRAs:

  • You will continue to receive payouts as computed if your spouse received the required minimum distributions before passing away.
  • If you want to submit a new timetable based on your anticipated longevity, you can do so.
  • You have a five-year window to withdraw money if the original owner didn’t make the statutory minimum distribution.
  • Traditional IRA withdrawals from inherited accounts are taxed as income.

You must adhere to different regulations since you are the beneficiary of an inherited IRA from someone other than your spouse. Not being able to:

  • Treat the traditional IRA you inherited as your own.
  • Contribute anything you’d want to the IRA.
  • Any funds should be transferred into or out of the inherited IRA.

As a Beneficiary of an Inherited IRA, Reduce Your Tax Burden

You can be subject to taxes if you receive an inherited IRA. Moreover, how you can handle inherited IRA laws and rules depends much on your relationship with the original IRA owner.

Work with tax experts to reduce your tax liability after receiving an inherited IRA. If you are a beneficiary of an inherited IRA, consult a tax expert at Your Part Time Accountant.