Inheriting an IRA

If you inherit an IRA from a loved one (not your spouse), there are some special rules that must be followed to avoid big tax consequences.

 

  1. Nonspouse beneficiaries of a traditional IRA must begin taking RMDs (or take the entire value of the IRA).The RMDs must begin the year following the year the IRA owner died.With a Roth IRA, the RMDs are necessary for nonspouse beneficiaries as well, but they do remain tax-free.

  2. Nonspouse beneficiaries cannot roll an inherited IRA into their own IRA account.A separate account must be set up, and the title MUST include the deceased owner’s name and that the account is for the beneficiary.

  3. If there is more than one beneficiary, be sure the IRA is split among the heirs.Age differences in the beneficiaries will affect the calculation of the RMDs over their lifetimes.

  4. If an IRA’s beneficiaries include a charity or other organization, that entity’s share MUST be paid out by September 30 of the year after the owner’s death in order to use the heirs’ life expectancies to calculate RMDs.

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