Opening an IRA is a fairly simple process – you can open most of them online with just a few clicks. Unfortunately, the rules regarding an IRA you inherited are more complex and often confusing. The rules vary depending on the type of IRA you inherit and your relationship to the original owner of the account.
If you inherit an IRA, it will fall into one of three categories: spouse, non-spouse, or entity. Here are three legacy IRA withdrawal rules you need to know about, depending on which category you fall into.
1. Withdrawal rules are different for spouses
As a spouse, inheriting an IRA is simpler than if you were another type of beneficiary (such as a child) or an entity (such as a trust or charity). As a widow or widower, you have the option of simply changing the IRA into her own name.
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If you are not a spouse, it is often best to change the account title to both the decedent’s name and your name. Doing so preserves the account’s tax-free or tax-deferred status. The title will have the name and date of death of the deceased person and the name of the widow/widower. For example, “John Doe IRA (died January 10, 2022) for the benefit of Jane Doe, beneficiary.”
2. The five-year rule applies
If you inherit a Roth IRA as a spouse, any funds can be withdrawn tax-free if the account has been in existence for at least five years. If not, you’ll have to wait until then to make tax-free withdrawals. You can also roll over an inherited Roth IRA to a new or existing Roth IRA if you don’t want to take money out of the account and prefer to let it continue to accumulate.
If you are not a beneficiary spouse, you cannot change the title of a Roth IRA in your own name, but you will have the option to transfer the funds to a new account or withdraw the entire amount in one payment. You can make withdrawals from the Roth IRA tax-free if the account has been open for at least five years.
3. The type of beneficiary you are matters
If you are not the spouse of the deceased person, you fall into one of two categories, and those determine your withdrawal rules. Persons considered eligible designated beneficiaries include the following:
- Minor children of the original account holder
- Those who are permanently disabled
- Those who are permanently ill
- Those who are not more than 10 years younger than the original account holder
If you do not meet the requirements to be considered an eligible Designated Beneficiary, you are only considered a Designated Beneficiary. If the original account owner died after 2019, you must withdraw all assets by the end of the 10th year after the account owner’s death. So if they passed away on January 10, 2022, you would have to withdraw all assets by December 31, 2032.
If the original account owner was required to take an RMD in the year of death but failed to do so, an RMD must be taken on the account by December 31 of the year in which the original account owner died.
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