Inherited IRA distribution rules [spouse and non-spouse beneficiaries’ guide]
![Inherited IRA distribution rules [spouse and non-spouse beneficiaries’ guide]](https://tfxstorageimg.s3.amazonaws.com/rcor3127swm8j1xvb9emf0djnhfa)
This article is for informational purposes only and does not constitute legal or tax advice.
Always consult with a tax professional for your specific circumstances.
Understanding the rules surrounding Inherited Individual Retirement Accounts (IRAs) can be a daunting task.
These rules are complex and depend on several factors, including the type of IRA, the date of the original owner's death, and the beneficiary's relationship to the original owner.
NOTE! In July 2024, the IRS finalized new rules that clarify how beneficiaries must handle inherited IRAs, particularly emphasizing the requirement for annual withdrawals. Staying updated with these changes is crucial for making informed decisions and avoiding potential penalties.
This article aims to demystify the inherited IRA distribution rules and provide a comprehensive guide on how it works.
What is an Inherited IRA?
An Inherited IRA, also known as a beneficiary IRA, is a type of retirement account that is opened when the owner of an IRA or a retirement plan passes away.
The assets from the deceased owner's account are transferred to the Inherited IRA, which is then managed by the beneficiaries.
Key factors influencing inherited IRA distribution rules
1. Type of IRA
The type of IRA – Traditional, Roth, SIMPLE, or SEP – affects the distribution rules.
For instance, distributions from a Traditional IRA are typically taxable, while qualified distributions from a Roth IRA are tax-free.
2. Date of the original owner's death
The date of the original owner's death is a crucial factor. If the original owner passed away before 2020, the beneficiary could take distributions over their lifetime.
However, if the owner died in 2020 or later, most non-spouse beneficiaries must withdraw all assets from the inherited IRA within 10 years, according to the SECURE Act.
NOTE! If the original owner passed away after 2019, the beneficiary must adhere to the new 10-year distribution rule, including mandatory annual withdrawals for many heirs.
3. Beneficiary's relationship to the original owner
The beneficiary's relationship to the original owner also influences the distribution rules.
Spouses have more options, including treating the IRA as their own or rolling it over into their own IRA.
Non-spouse beneficiaries usually have to withdraw all the money within 10 years.
Distribution rules for Spouse beneficiaries
Spouses who inherit an IRA have the most flexibility.
They have several options depending on whether the original account holder died before or after their Required Minimum Distributions (RMDs) began.
They can:
- treat the IRA as their own, designating themselves as the account owner,
- roll the assets from the deceased’s account into an existing IRA in their name,
- treat themselves as the account beneficiary.
Each option has its own tax implications, so here's a detailed breakdown:
1. Traditional IRA: Spouse Inherits
- If the account holder died before their RMD required begin date:
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into your own existing or new IRA |
At any time, but a penalty will apply to withdrawals made before you reach age 59½. |
Only available if you are the sole beneficiary. IRA assets can continue growing tax-deferred. If you are under 59½ you'll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions without paying the 10% early withdrawal penalty — unless you meet one of the IRS penalty exceptions. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited IRA held in your name. |
Required Minimum Distributions (RMDs) are mandatory, and you have the option to postpone distributions until the later of: The year in which the decedent would have attained age 73, or 12/31 of the year following the year of death. Distributions must begin no later than 12/31 of the year the account holder would have reached 73. |
Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited IRA held in your name. |
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. |
You are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred for up to ten years. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
None. All assets in the IRA are distributed to you. |
All at once. |
You will pay income taxes on the distribution all at once. You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |
Also read - IRS Tax Brackets and Inflation Adjustments
- If the account holder had already reached their required beginning date to start taking Required Minimum Distributions (RMDs) 73 or over:
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into your own existing or new IRA. |
At any time, but a penalty will apply to withdrawals made before you reach age 59½. |
Only available if you are the sole beneficiary. IRA assets can continue growing tax-deferred. If you are under 59 you'll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions without paying the 10% early withdrawal penalty — unless you meet one of the IRS penalty exceptions. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited IRA held in your name. |
Required Minimum Distributions (RMDs) are mandatory, and you have the option to postpone distributions until the later of: The year in which the decedent would have attained age 73, or 12/31 of the year following the year of death. Distributions must begin no later than 12/31 of the year the account holder would have reached 73. |
Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer. If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
None. All assets in the IRA are distributed to you. |
All at once. |
You will pay income taxes on the distribution all at once. You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |
2. Roth IRA: Spouse Inherits
- If you are inheriting a Roth IRA as a spouse, you have several options — including opening an Inherited IRA:
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into your own existing or new Roth IRA. |
At any time, but earnings generally will be taxable until you reach age 59½ and the five year holding period has been met. |
Only available if the spouse is the sole beneficiary. You'll be regulated by the same distribution rules as if the IRA had been yours originally; normally early withdrawal penalties may still apply. You may designate your own IRA beneficiary. |
| Account Type | Money Availability | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited Roth IRA held in your name. |
Required Minimum Distributions (RMDs) are mandatory and you have the option to postpone distributions until the later of: When the decedent would have attained age 73, or 12/31 of the year following the year of death. |
Distributions are spread over the beneficiary's single life expectancy. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary. Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-free. You may designate your own beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
The assets are transferred into an Inherited IRA held in your name. |
At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. |
Distributions may be taken during that period without being taxed (provided that the ten-year holding period has been met), otherwise, only earnings are taxable. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-free for up to ten years. You may designate your own beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
None. All assets in the Roth IRA are distributed to you. |
All at once. |
If the account is less than five years old at the time of the account holder's death, earnings are taxable. |
NB! Remember, every situation is unique, so it's essential to consult with a tax professional to understand the specific rules that apply to you.
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Distribution rules for Non-Spouse beneficiaries
Non-spouse beneficiaries have fewer options.
If you inherited an IRA from someone other than your spouse, the withdrawal rules differ depending on the type of beneficiary you are (Eligible Designated Beneficiary or Designated Beneficiary).
Eligible Designated Beneficiaries (that are not the spouse) include:
- Minor children of the original account holder (decedent),
- Those who are chronically ill,
- Those who are permanently disabled,
- Those who are not more than 10 years younger than the original account holder (i.e. – a sibling or friend that is age 60 when the account holder was age 69).
Designated Beneficiaries: if you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
- Fully distribute all assets by the end of the tenth year after the year the account holder died
- If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period.
- NB! If the original account holder did not take an RMD in the year of death and they were required to, an RMD must be taken from the account by 12/31 of the year the original account holder died.
A detailed breakdown for Eligible Designated Beneficiary options (other than a spouse):
1. Traditional IRA: non-spouse inherits
If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA and are an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options.
- If the account holder died before their required beginning date to start taking Required Minimum Distributions (RMDs), these are your choices:
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited IRA held in your name. |
RMDs must begin no later than December 31 of the year after death. |
Your annual distributions are spread over the beneficiary's single life expectancy determined by your age in the calendar year following the year of death and reevaluated each year. Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns age 21. At that point, the distribution option is required to switch to the 10-year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns age 21. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own IRA beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
The assets are transferred into an Inherited IRA held in your name. |
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. |
You are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred for up to ten years. You may designate your own IRA beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
None. All assets in the Inherited IRA are distributed to you. |
All at once. |
You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |
- If the account holder died after their required beginning date to start taking Required Minimum Distributions (RMDs), these are your choices:
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited IRA held in your name. |
RMDs must start by December 31 of the year after death. NOTE! If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died. |
Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder's remaining life expectancy, whichever is longer. Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns age 21. At that point, the distribution option is required to switch to the 10-year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns age 21. If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
None. All assets in the IRA are distributed to you. |
All at once. |
You will pay income taxes on the distribution all at once. You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |
2. Roth non-spouse inherits
- If you inherit a Roth IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options:
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
You transfer the assets into an Inherited Roth IRA held in your name. |
Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death. |
Distributions are spread over the beneficiary's single life expectancy. Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns age 21. At that point, the distribution option is required to switch to the 10-year method and all remaining assets need to be distributed by the end of the 10th year after the minor turns age 21. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary. Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-free. You may designate your own beneficiary. |
| Account Type | Money is Available | Other Considerations |
|---|---|---|
|
The assets are transferred into an Inherited Roth IRA held in your name. |
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. |
Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the tenth year after the year in which the account holder died. Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-free for up to ten years. You may designate your own beneficiary. |
| Account Type | MONEY AVAILABILITY | Other Considerations |
|---|---|---|
|
None. All assets in the IRA are distributed to you. |
All at once. |
Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. You will not incur the 10% early withdrawal penalty. |
Tax implications of Inherited IRAs
Withdrawals from an inherited IRA may be taxed differently depending on the account type.
For example, assets inherited from a Roth IRA will be taxed differently than a traditional IRA. Any person, estate, or trust can inherit an IRA, but spouses have more flexibility on using an inherited IRA.
New Tax Penalties and Relief
The IRS has shown leniency for missed distributions from 2021 to 2024, excusing penalties for those years due to the recent rule changes. Additionally, the penalty for missed withdrawals has been reduced from 50% to 25%, providing some relief for beneficiaries who may have been uncertain about the requirements.
Bottom line
Inherited IRA distribution rules can be complex and confusing. However, with the right guidance and understanding, you can navigate these rules and make the most of your inherited assets.
Remember, every situation is unique, so it's essential to consult with a tax pro to understand the specific rules that apply to you.
For personalized advice and assistance, don't hesitate to contact us at TaxesForExpats. We're here to help you navigate the complexities of tax planning and compliance.