How to Follow IRS Regulations for an Inherited IRA
When someone with an IRA account dies, his designated beneficiary typically inherits the IRA. The relationship of the deceased to the beneficiary determines what the beneficiary can do with the account. IRS regulations for inherited IRAs explain what steps to follow.
- Difficulty:
- Easy
Instructions
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IRS Regulations for an IRA Inherited From Your Spouse
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1
Continue to contribute to your inherited IRA to claim it as your own IRA. Follow IRS regulations regarding contribution limits for traditional IRAs.
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2
Roll over funds to an IRA in your own name if you so choose. This can be an IRA that you previously had or a new account. The rollover account lengthens the tax-deferral status of your funds until you reach 70 1/2 years old, at which time you must follow the IRS requirements for mandatory distribution.
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3
Create an inherited IRA beneficiary distribution account into which you transfer the inherited funds. This is beneficial to you if you are younger than 59 1/2 years old and anticipate needing the money before that age. You can access the funds this way without being subject to a 10 percent early withdrawal penalty.
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4
Disclaim the inherited IRA, allowing it to pass to the secondary designated beneficiary. You must file this claim within 9 months of inheriting the IRA. Be sure to consult with your lawyer before making this important decision.
IRS Regulations for an IRA Inherited From a Nonspouse
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1
Set up an inherited IRA account and do a trustee-to-trustee transfer. If you inherit an IRA from a person who is not your spouse, you are not allowed to roll assets into your own account. When doing this type of transfer, you can then name a designated beneficiary for the account.
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2
Elect to take a cash payout for the entire inherited amount. Keep in mind, though, that the IRA's assets are considered income and will be subject to taxes on your next income tax return.
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3
Disclaim the IRA assets within 9 months of the death of the IRA account holder. The IRA will then be passed down to the next beneficiary listed. Discuss this option with your attorney before making your final decision, since it is irrevocable.
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1
Tips & Warnings
You will be charged a 10 percent early withdrawal tax penalty if you withdraw funds from your own IRA before you reach the age of 59 1/2. However, if you have rolled assets from your inherited IRA into your own account, you will not have to pay the penalty on those funds.
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Comments
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bryanlake
Jan 17, 2009
For non-spouse...you actually HAVE to start taking distributions from the inherites account by Dec 31st of the year following the decedant's death. You can 1: do it in lump sum (greatest tax due, but maybe you have a need for the money); 2: do it over 5 years; or 3: spread it out over YOUR OWN life expectency based on IRS tables and your age (smallest tax burden each year and allows the asset to continue to appreciate, assuming an appreciating market, which we have historically over the long haul).
