Inherited IRA Required Minimum Distribution
If you inherit an IRA, you have money that may be used for your retirement. However, these additional funds may need to be spent immediately. It all depends on who you are in relation to the original owner. Make sure you understand the IRS' rules for required minimum distributions from an inherited IRA to avoid unnecessary tax penalties.
Other People Are Reading
-
Types
-
There are two types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA is an IRA that accepts tax deductible contributions. In exchange, you must pay taxes on all withdrawals from the IRA. A Roth IRA is an IRA that only accepts after-tax contributions. In exchange, all withdrawals are tax-free.
Potential
-
If you are the spouse of the original IRA owner, you may elect to treat the IRA as your own. Alternatively, you may rollover the original IRA into an existing IRA that you own. Either way, you may continue to make contributions to the IRA and treat it as you would your own. If you are not the spouse of the original IRA owner, then you cannot make contributions to the account. You must make distributions under one of two IRS rules. You must remove all of the money in the IRA by December 31 of the fifth year following the owner's death or you must take lifetime distributions from the IRA. The distributions cannot extend beyond your lifetime.
-
Benefit
-
The benefit of inheriting an IRA is that you receive money that you otherwise would have to have saved on your own. This may help you accelerate your own retirement plan. For Roth IRAs, you won't pay taxes on any of the distributions. This means you could use those Roth IRA distributions to fund a new Roth IRA, keeping the tax benefits of the Roth IRA.
Disadvantage
-
The disadvantage to inheriting a Roth IRA is that, if you are not the spouse of the owner, you must take distributions. If you intend to use the money for your own retirement planning, this may slow down the process of investing. Since you are not allowed to rollover the IRA unless you are the spouse of the owner, the money has to be contributed to a new retirement plan over time, and it cannot exceed the contribution limits of your own retirement plan.
Considerations
-
If you intend on using the money to fund a new retirement plan, consider taking payments over time that will equal the maximum annual contribution for your retirement plan. This way, you can keep the inherited IRA funds invested while you make contributions to the new account. Also, since you will pay taxes on the traditional IRA contributions anyway, consider reinvesting the funds into a Roth IRA. This will avoid future taxation of investment income.
-
