How To Handle Inherited IRA Required Minimum Distributions

Individual retirement accounts are designed to help people save enough money to ease into retirement. What happens, though, when the unthinkable occurs and that money is no longer needed by the individual? Losing a loved one is never easy to deal with and money is usually the last topic anyone wants to mention, but unless you want their life’s work to be in vain, financial issues need to be addressed, especially if you are the designated beneficiary of an inherited IRA.

Inherited IRA Options

When dealing with IRA inheritances, there is one distinction that needs to be made: Is the beneficiary the spouse of the deceased? If so, they have the option to do an IRA rollover of the inherited fund into their own retirement account, become the titleholder of the account without a rollover or keep the inheritance as a beneficiary.

If they do decide to do an IRA rollover or designate themselves as account holder, it is then treated as their own normal IRA, be it ROTH or traditional. There is no deadline to decide on a rollover, so you can remain a beneficiary for several years and then decide to do a rollover later.

Inherited IRA Required Minimum Distributions

If the beneficiary was not the spouse or the spouse opted against a rollover, then they will be required to begin IRA withdrawals of the funds. For non-spouse beneficiaries, inherited IRA required minimum distributions will be made the year following the death of the original account owner.

For spouses remaining as beneficiaries, RMDs will begin when the original owner was supposed to begin taking them. In any case, since beneficiaries are required to take RMDs, they will not be charged a penalty for early withdrawal regardless of their age. However, for ROTH IRA inheritances, any withdrawals made before the account has satisfied the standard five-year holding period will be subjected to income taxes but not an early withdrawal penalty.

If there are multiple beneficiaries, they can opt to separate the IRA account into individual accounts and be treated accordingly as such. If not, all beneficiaries will be treated as non-spouses and distributions will be made according to the life expectancy of the eldest beneficiary.

Calculating the IRA Withdrawal Amount

Currently, the IRS will calculate distributions according to the total amount of the IRA, divided by the life expectancy of the original owner. However, starting in 2011, it will be based on the life expectancy of the beneficiary. Non-spouse beneficiaries can also opt to withdraw the entire amount of the account within the first five years after the deceased passed away.

For more information on how to handle an IRA inheritance, be sure you understand the rules the IRS has laid out. Figure out what makes the most financial sense for you because if your loved one thought enough of you to leave you their retirement fund, you at least owe it to them to make sure you maximize their last gift.