New Rules for Inherited IRAS



For those intending to leave and individual retirement account (IRA), there are new roles on how quickly you must withdraw the money. You do not want to make mistakes in withdrawals from an inherited IRS because the IRS can levy a 50% penalty on whatever amount it says you should have withdrawn.


Spouses can still use the “stretch” IRA strategy, which sets annual required minimum distributions (RMDs) based on life expectancy. For everyone else here are the key rules for inherited IRAs:


You do not have to withdraw money each year. All that matters is that the account is empty at the end of the 10th year following the year the original owner died. That said, if it is a sizable amount in a traditional IRA, you should consider taking money out over a number of years.


If the deceased had a required minimum distributions (RMD) due for the year of his/her death, the beneficiary must take the distribution. Failure to do that can result in a penalty of 50% of the amount that should have been withdrawn. Anyone who is at least 72 years old must take the annual RMDs from traditional IRAs.


Beneficiaries should empty Roth IRAs within 10 years. You can withdraw contributions the owner made at any time tax-free. Earnings are taxable if the account was set up by the deceased less than five (5) years before death. In that case, the beneficiary should wait until the account hits the five-year mark before considering withdrawing earnings.


Some non-spouse beneficiaries may be able to use the old RMD method. If the beneficiary meets the IRS definition of being disabled or chronically ill, RMDs based on life expectancy are allowed. The same is true of beneficiaries who are within 10 years of the age of the deceased. Minor children can also take RMD’s until they reach the age of maturity-typically age 18-at which point the 10 year rule kicks in. Grandchildren are held to the 10 year rule.


If the IRAs inherited by an estate or trust, there are different rules. If the deceased was not yet taking RMD’s, the account must be fully withdrawn within five years. If the deceased was taking RMDs, withdrawals can continue to be made using the RMD method.


Every dollar you withdraw from a traditional IRA is taxed as ordinary income. If you inherited a sizable IRA, we recommend consulting your tax professional to plan a withdrawal strategy over the allowed time period to minimize your tax bill. For non-spouses, it might may be wise to spread withdrawals over multiple years within the 10 year window.


If you inherit a Roth IRA and do not need the money anytime soon you might consider waiting until late in the 10th year to move the money. That way you can enjoy a decade of tax-deferred growth before you must move the money to a taxable account.  Withdrawing the money from a Roth IRA should not trigger a tax bill but all of the money must be withdrawn.