What to Know If You Inherit an IRA

Have you recently become the beneficiary of a deceased person’s retirement account such as an Individual Retirement Account (IRA)? The rules for inherited IRAs are complex and can be difficult to understand. Included below are a few key items beneficiaries should become familiar with. Your Jemma Financial Advisor is available to review your personal financial situation and help you understand the rules so you can avoid any tax implications.

Whether it is a Traditional, Roth, SIMPLE or a SEP IRA, after the death of the original owner, the funds from their account will be moved to a newly opened IRA in the beneficiary’s name.

For those who inherited a non-spouse IRA after 2019, the rules around required minimum distributions (RMDs) may affect how you withdraw the funds. Specifically, the 2020 SECURE Act eliminated the “stretch” life expectancy distribution rule for most non-spouse inherited IRA beneficiaries. Therefore, keep in mind the following:

The Year of the Inheritance

Beneficiaries who inherited an IRA prior to 2020 are grandfathered under the old rule and can still stretch their withdrawals over the course of their own expected lifetime.

Beneficiaries who inherited an IRA after 2019 must empty their entire account by the end of the 10th year after the death of the original account holder. Any undistributed amount could be subject to a 50% penalty.

Withdrawals

Since withdrawals from an inherited Traditional IRA are required, you will not be subject to an early withdrawal penalty even if the beneficiary is younger than age 591/2. However, all withdrawals will be taxed as ordinary income regardless of your age.

Withdrawals from an inherited Roth IRA are tax-free at any time and earnings are tax-free if the account was open for at least five years before the owner’s death.

 
If you recently inherited an IRA, a Jemma Financial Advisor can help you understand your options to determine the best course of action.