Inherited IRA Rules for Non-Spouse Beneficiary

If you are a non-spouse who inherits an Individual Retirement Account (IRA), Internal Revenue Service (IRS) rules require you to begin taking money from it shortly after the original owner's death.

Significance

The federal government established IRAs to give working people a tax benefit to invest for their retirements: IRA assets are not taxed as long as they remain in the account. However, this tax shelter was not intended to protect inherited wealth indefinitely. Therefore, IRS rules require heirs to make withdrawals.

Time Frame

Non-spouse IRA beneficiaries may either let an inherited IRA sit for up to five years before withdrawing it entirely or begin taking required minimum distributions (RMDs) by Dec. 31 the year following the original owner's death.

Features

Generally, an IRA beneficiary calculates her annual RMD by dividing the account's worth the previous Dec. 31 by her life expectancy, according to IRS tables. Taking RMDs, as opposed to a lump sum, prolongs an IRA's tax shelter by allowing a portion of the assets to remain inside the account as long as possible.

Warning

IRA beneficiaries who fail to take a RMD when required to by the IRS are charged a 50 percent penalty on the amount they should have withdrawn.

References

• IRS Publication 590: IRA Beneficiaries
• IRS Publication 590: Distributions After Owner's Death