Inherited IRA’s as an IRA investment can be tricky. Inherited IRA’s can sometimes be called Stretch IRA’s.
If you are named as the beneficiary of an IRA investment and the owner of the IRA dies, stop, don’t do anything until you learn the rules. Managing an inherited IRA can be complicated.
IRA withdrawals and distributions from an inherited or stretch IRA can get confusing because of the many rules that apply. Your IRA withdrawals or distribution alternatives depend upon a few factors. We will highlight the basic rules but for a more thorough review, check with your accountant or financial adviser.
Stretch IRA reference:
The benefits of an inherited IRA’s in some situations can be “stretched” out.
Under the right circumstances, the IRA withdrawals can be “stretched” out.
Most of the taxes on the withdrawals can be “stretched” out or deferred for an extended period of time.
If managed properly, this extended period of time can be over the lifetime of the beneficiary.
This extended period can also be stretched over future generations.
Inherited IRA Rules: if inherited from someone other the spouse of the deceased.
You cannot treat the IRA as your own.
You cannot make contributions to it.
You cannot rollover any amounts into it or out of it.
You will not owe taxes on it until you receive distributions.
Required Minimum Distribution (RMD)
The Required Minimum Distribution is the amount required by law that must be distributed each year from your retirement account investments.
The distribution amount is calculated based the life expectancy of the account holder.
If you do not take the RMD, you will be taxed.
Traditional IRA’s have to follow the RMD rules.
Roth IRA’s do not have to follow the RMD rules, while the owner is alive.
See below for a list of other retirement plan accounts that have to follow RMD rules.
RMD’s must begin the year the account holder turns 70 1/2.
The first RMD can be delayed until April 1st the year after the account holder reaches age 70 1/2.
This is called the Required Beginning Date.
Required minimum distributions must be taken every year after the Required Beginning Date starts.
Required Beginning Date (RBD)
- The Required Beginning Date is not considered to have started if the IRA owner dies after reaching age 70 1/2 – but before April 1st of the next year.
- The Required Beginning Date determines your IRA withdrawal options as a beneficiary.
- Withdrawal options will differ depending on whether the RBD was started or not before the death of the original IRA owner.
- If the RBD was not started, the IRA must be distributed to the beneficiary.
- You can take the money in a lump sum; but you will be taxed immediately.
- This distribution can be within 5 years of the owner’s death.
- Or the distribution to the beneficiary can be over the life of the beneficiary, starting no later than 1 year following the original IRA owners death.
- If the RBD was started before their death, you have to continue to receive the same distribution they started, unless you submit a new distribution schedule.
- The new distribution schedule would be based on your life expectancy.
Retirement Plans That Must Follow RMD Rules:
- Traditional IRA investments.
- Roth IRA’s do not have to follow the RMD rules, while the owner is alive.
- 401k accounts
- 403b accounts
- 457b plans
- Profit Sharing Plans
- SEP plans
- SARSEP plans
- Simple IRA plans
- Roth 401k accounts
If you inherit an IRA, stop and learn the rules before you make a move.