Inherited IRA: Important Options for Non-Spouse Beneficiaries

Inheriting an IRA divides you into two groups: a non-spouse or a surviving spouse. The rules and options for what to do with an IRA you inherit are different for each group. There are some options a spouse has that a non-spouse does not have, including rolling the IRA to a new or existing IRA held in their name or leaving the IRA as it is. In this article we will be reviewing the options for a non-spouse who in general has the following choices:

(1) Transfer the IRA to a new or existing Inherited IRA held in your name. 

      Method 1: The Life Expectancy Method

  • Distributions for both Traditional and Roth IRAs must start no later than December 31 of the year after the account holder died or else it will automatically default to the 5 Year method (described below).
  • As long as the assets have been in the Roth IRA for five or more years, the RMDs can be withdrawn federally tax-free.
  • Annual distributions are spread over your single life expectancy.
  • If the original account holder was over 70 ½ and did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died.
  • If there are multiple beneficiaries, separate accounts must be established by December 31 of the year following the year of death; otherwise, required distribution amounts will be based on the oldest beneficiary's age.
  • You will not incur the 10% early withdrawal penalty if the distribution is taken before 59 ½.
  • The account will be considered an inherited IRA.
  • You may designate your own IRA beneficiary.

      Method 2: The 5 Year Method

  • This is an option if the account owner was under 70 ½ when he or she died. 
  • You have five years in which you can withdraw the inherited assets from the Inherited IRA at any time and amount, as long as they are fully withdrawn by December 31 of the fifth year following their death.  
  • You will not incur the 10% early withdrawal penalty if you take a distribution before 59 ½.
  • Distributions from a Roth IRA can be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable.
  • The account will be considered an inherited IRA.
  • You may designate your own IRA beneficiary.

(2) Take a Lump Sum Distribution.

  • All assets in a Traditional IRA are distributed to you and you will pay income taxes on the distribution all at once.
  • For a Roth IRA, if the account is less than five years old at the time of the account holder’s death, the earnings are taxable.
  • You will not incur the 10% early withdrawal penalty if the distribution is taken before 59 ½.
  • You may move to a higher tax bracket depending on the amount of taxable distributions and your current income level.

(3) Disclaim the IRA

  • You may refuse to accept ownership of the IRA either in part or in full and it will go to the contingent beneficiary.
  • You must disclaim the account within nine months after the death of the account owner and before you take possession of the funds.
  • Once you disclaim the IRA, you are unable to get the money back if you change your mind.

Carol Chaudet

Last Update: 06/29/2016