How to Handle an Inherited IRA

inherited IRA
Marla Brill

By Marla Brill | Jun 10th, 2019

IRAs held nearly $9 trillion at the end of 2018, more than a nine-fold increase from 1993. The fact that they’ve become so popular increases the odds that you will inherit an IRA, pass one along to heirs, or both.

The tax treatment of inherited IRAs is complex and making the wrong move can be costly. The rules are different for spouses than they are for other relatives or friends. Individual factors such as your age, the age of the account owner, and whether you prefer to receive a large payment or maximize tax-deferral strategies also come into play in deciding how to handle things.

Non-Spouse Beneficiaries

The rules for non-spouse beneficiaries apply whether you are a sibling or a distant cousin or friend of the account owner.

With a traditional IRA, a 10 percent early withdrawal penalty usually applies for distributions before age 59 1/2. In most cases, that penalty does not apply for an inherited IRA, regardless of age. But you still need to pay income taxes on any withdrawals.

Typically, the first step is to transfer the money from a traditional IRA to an inherited IRA held in your name. After that, you have to decide how to take the money out using one of several options.

Non-spouse beneficiaries should be aware that inherited IRAs are not protected from creditors in bankruptcy under federal law, although some states may offer such protection.

Spousal Beneficiaries

The rules are a bit more flexible when it comes to spousal beneficiaries. In these cases, there are several options available:

Be aware that the rules for particular plans can vary from one firm to another, and they don’t always conform to IRS guidelines. For example, some may have not had the full range of withdrawal options allowed by government guidelines. Additionally, the rules for estates and trusts differ from those of designated beneficiaries. To evaluate the potential impact an IRA inheritance may have on your taxes, consult a tax advisor.

Marla Brill

Marla Brill

Marla Brill has been a personal finance journalist for over 30 years,  writing about money topics for Reuters, The Boston Globe, Financial Advisor Magazine, MarketWatch, PBS’s NextAvenue, and other publications.


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