Inherited IRA? Here’s what you need to know | Smart Change: Personal Finance

(Steven Walters)

The rules surrounding an inherited IRA are a little more complex than those you encounter when opening and financing your own account, and which ones will apply largely depends on which category of beneficiary you belong to: spouse, child, or non-spouse, or an entity such as a property or charity. Each of these groups has its own set of rules about taxes and withdrawals. If you inherit an IRA, here’s what you should know.

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Inherit the IRA from the spouse

Inheriting the Irish Republican Army From the pair is the simplest of the three scenarios. As a widower or widower, you can either rename the IRA to your name or transfer the money in it to a new IRA account.

If it’s a Roth IRA, you can withdraw any tax-free money if the account has been in existence for at least five years. If you haven’t been five years old, you’ll have to wait until that point to make tax-free withdrawals. Converting an inherited IRA to a new or existing Roth IRA is a good way for anyone who doesn’t want to withdraw money from the account, and prefers letting it continue to grow and swell.

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For a traditional IRA, the rules for inheritance are slightly different. You can withdraw all the money, but you will have to pay income taxes on the full amount. You can also transfer money from an inherited IRA to your traditional IRA, but you will have to create typical RMDs. If you are not 59 and a half years old and take a withdrawal, you will be subject to a 10% early withdrawal penalty.

Inherit an IRA as a non-spouse or entity

If you inherited an IRA from a parent or family member, you won’t be able to rename it in your own name, but you will have the option to transfer the money in it to a new account. You can also cash out the whole amount as a lump sum distribution. if it was Ruth IranWithdrawals will be tax-free as long as the account is at least five years old. If it’s a traditional IRA, you’ll pay income taxes on the money you withdraw.

With traditional IRAs, non-spouse beneficiaries cannot make contributions to the inherited IRA or carry forward any amounts into or out of the inherited IRA. However, a beneficiary can make a trustee-to-guardian transfer for as long as the IRA into which the funds are transferred is set up and maintained as an inherited IRA in the name of the deceased IRA owner for the benefit of the beneficiary.

Non-spouse beneficiaries usually have to withdraw the full amount from an inherited IRA within 10 years of the original owner’s death. There are exceptions for minor children of the deceased and those under the age of 10. In these cases, heirs may be able to take the required minimum distributions (RMD) based on life expectancy.

Ask for help if needed

The rules about inherited IRAs can be confusing on the go, but getting clarity on them can help you avoid unexpected penalties or tax bills. If you find yourself overwhelmed by different options, don’t be shy about it asking for help From a professional who can make sure you understand all the implications of your choices. This can save you a lot of trouble – and possibly a lot of money.

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