If you inherit an IRA from somebody other than your spouse, you may wish to honor that individual by carefully deciding how to handle the account that has been passed to you. The tax consequences can be severe (over 50% in some instances) for failing to take appropriate action in regards to the proceeds of the Inherited IRA. A number of scenarios are described below but, you should consider contacting a qualified tax advisor to review your specific situation.
In most cases the options below are the same whether the IRA is a Traditional IRA or a ROTH IRA. Any exceptions are noted.
The Beneficiary Calculator on the left may help in determining any RMDs that may required.
Scenario 1 – The Accountholder Dies Before the Required Beginning Date (RBD)
If the accountholder dies before his/her RBD (generally April 1 of the year after they turn age 70½), you must begin taking Required Minimum Distributions (RMDs) based upon your remaining life expectancy by December 31 of the year after the accountholder’s death. You will need to take an RMD each year thereafter by December 31, in order to avoid a 50% tax penalty on the amount required for that year. You may always take more than the RMD but, should be aware of the potential tax liability.
Instead of taking the above RMDs, you may choose to withdraw (and pay the taxes on) the entire account balance by the end of the fifth year following the year of the accountholder’s death.
Scenario 2 – The Accountholder Dies After the RBD
If the accountholder dies after his/her RBD, you must begin taking the RMDs described in Scenario 1, above. The only difference here is that you also must arrange for the RMD for the accountholder to be withdrawn by the end of the year of death, if it has not already been withdrawn. Also, the “5 year” option is not available to you.
Scenario 3- You Inherit an IRA from an Accountholder’s Spouse
In this scenario you options differ depending on whether the spouse chose to treat the account as his/her own, or not.
If the spouse elected to treat the account as his/her own then, you will likewise treat the account as if it had always belonged to the spouse. As such, you would make your decision based upon Scenario 1 or Scenario 2, depending on the age of the Spouse at the time of death. ROTH EXCEPTION: If the IRA is a ROTH IRA, then you would always use the options under Scenario 1, regardless of the spouse’s age at the time of death.
If the spouse did not elect to treat the account as his/her own and RMDs have not begun, you may proceed under the options in Scenario 1, above.
If the spouse did not elect to treat the account as his/her own and RMDs have begun, you must first make sure that the RMD is calculated and withdrawn for the year of the spouse’s death, based upon the spouse’s age. You would then resume the spouse’s RMD schedule each year, using the factor used in the year of death, reduced by one for each year subsequent to that year.