I’ve recently had issues with a few different clients recently who have inherited IRAs and are not clear on the rules surrounding them. Here are a few questions that can help you understand the rules around your Inherited IRA.
- Was it your spouse’s IRA? If so, you can generally combine it with your own IRA. This can greatly simplify your financial situation, but there can be reasons to maintain it separately (if there are children from a previous marriage who will ultimately inherit the remainder of this account, etc). You will need to eventually take Required Minimum Distributions from this account, but typically not until after you’ve reached age 70 1/2.
- Was it your parent’s or aunt/uncle’s IRA? Or anybody else that you weren’t married to? Things are a bit trickier with IRAs inherited from your parents. You must begin taking required minimum distributions (RMD’s) on those assets by December 31st of the year following the account owner’s death. The RMD rules are critical, and must be followed explicitly. The tax penalties for not taking your RMDs on time are severe, so be sure you’re on top of this. A simple calendar reminder in November of each year to check and be sure you’ve taken your distribution for the year can be enough to save you from a costly mistake.
- Were you named as the beneficiary of the IRA? Or did the deceased’s estate take ownership and transfer it to you through the probate process? I realize this is a bit of industry jargon, but the distinction is critical. If you were named as the beneficiary of the IRA, you can ’stretch’ out the distributions from that IRA over the course of your working life, allowing you to extend and benefit from the tax-favored nature of the asset. If you were not named as the beneficiary directly, you need to know how old the person whose IRA you are inheriting was when they passed away. If they were over age 70 1/2, then you can take distributions over the IRS tables calculated based on their life expectancy. If they were under age 70 1/2, then you must take the distributions over 5 years and the entire balance of the account must be completed distributed by December 31st of the fifth year after the IRA owner’s death. (You can find the tables and other great information in IRS Publication 590, which has everything you’d ever want to know about IRAs).
The above general principles should help you stay on track when inheriting an IRA. If you’ve got additional questions about your situation, please contact me and I’ll do my best to answer your questions.