how an inherited ira works
an inherited ira is also known as a beneficiary ira many of the top brokers for iras provide support in resolving matters related to the inheritance of ira assets taxation issues and continuation of retirement account status tax laws surrounding inherited iras are quite complicated and they became even more so with the setting every community up for retirement enhancement secure act of 2019 which made some significant changes to the regulations mainly for non spousal heirs 1a beneficiary may open an inherited ira using the proceeds from any type of ira including traditional roth rollover sep and simple iras generally assets held in the deceased individual s ira must be transferred into a new inherited ira in the beneficiary s name this transfer must be made even if a lump sum distribution is planned you cannot make additional contributions to an inherited ira the internal revenue service provides guidelines for inherited ira beneficiaries 1 irs forms 1099 r and 5498 are required for reporting inherited iras and their distributions for tax purposes inherited iras are treated the same whether they are traditional iras or roth iras the tax treatment of withdrawals does vary consistent with the type of ira funded with pre tax dollars like the traditional type or post tax dollars like with the roth inherited iras rules for spousesspouses have more flexibility in how to handle an inherited ira for one they can roll over the ira or a part of the ira into their own existing individual retirement accounts the advantage of this rollover is the ability to defer required minimum distributions rmds of the funds until they reach the age of 73 rmds previously began at 70 but the age was raised to 72 following the december 2019 passage of the setting every community up for retirement enhancement secure act this limit has since been increased again to 73 as part of secure 2 0 act 2they have 60 days from receiving a distribution to roll it over into their own iras as long as the distribution is not a required minimum distribution spousal heirs can also set up a separate inherited ira account as described above how they deal with this ira depends on the age of the deceased account holder if the original owner had already begun receiving rmds at the time of death the spousal beneficiary must continue to receive the distributions as calculated or submit a new schedule based on their own life expectancy if the owner had not yet committed to an rmd schedule or reached their required beginning date rbd the age at which they had to begin rmds the beneficiary of the ira has a five year window to withdraw the funds which would then be subject to income taxes inherited iras rules for non spousesnon spouse beneficiaries may not treat an inherited ira as their own that is they may not make additional contributions to the account nor can they transfer inherited funds into their existing ira account non spouses may not leave assets in the original ira they must set up a new inherited ira account unless they want to distribute the assets immediately via a lump sum payment it is in the realm of distributions that the secure act most significantly affects non spouse inheritors of iras previously these beneficiaries could handle rmds as spousal heirs could specifically they could recalculate them based on their own life expectancy which often significantly decreased the annual amount that had to be withdrawn and the tax due on them in the case of traditional iras 1if you inherit a roth ira you are required to take distributions unlike the original account owners but the funds remain tax free and also free of any early withdrawal penalty even if you re under 59 now the secure act dictates that for accounts inherited after dec 31 2019 non spouse beneficiaries typically must cash out the account within 10 years of the original owner s death some heirs are exempted for beneficiaries in these categories and those who already have inherited iras the old distribution rules and schedules apply there s no particular timetable for the withdrawals you can take the money out in small withdrawals or all at once your options for receiving benefitsira beneficiaries have several options for claiming their inheritance but choices depend on their relationship to the decedent all beneficiaries have the option to receive a lump sum distribution of the funds or disclaim the inheritance depending on the type of account inherited natural beneficiaries may elect to leave the proceeds in the plan spouses have the most options followed by natural non spousal beneficiaries non natural beneficiaries have the fewest options as a spouse inheriting ira funds you have the most options for protecting and receiving your inherited funds you may elect to non spousal beneficiaries include natural persons and non natural persons for non natural persons such as charities businesses trusts and estates funds can be distributed as a lump sum or transferred into an inherited ira in the name of the beneficiary for natural non spousal beneficiaries funds can be frequently asked questions faqs 