What to Do When You Receive an IRA As an Estate Beneficiary
If you are the beneficiary of an individual retirement account that passed to an estate, talk to a tax professional who can advise you about your options. Inherited IRA rules are complicated. Generally, you do not have the same flexibility as a designated beneficiary to keep the account open and may be required to close it within five years.
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Function
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If you inherited an IRA that passed to an estate first, Internal Revenue Service rules tie your hands. Unlike designated beneficiaries, you cannot take required minimum distributions (RMDs) based on your own life expectancy. The IRS calculates RMDs by dividing the account's worth the previous Dec. 31 by the number of years it expects an IRA owner to live. Instead, you must either empty the account within five years or take RMDs based on the original owner's life expectancy.
Required Minimum Distributions
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Traditional and Simplified Employee Pension (SEP) IRAs have what the IRS calls a "required beginning date" -- the time at which an owner must begin taking withdrawals from the account. The deadline is normally Dec. 31 the year the owner turns 70 1/2. If the original owner died after his required beginning date, you can take RMDs based on his life expectancy, strange though this may seem. You can look up how long the IRS expected the original owner to live in life expectancy tables in IRS Publication 590.
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Five-Year Period
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If you inherited a Roth IRA, or traditional or SEP IRA whose owner died before his required beginning date, you have until Dec. 31 of the fifth year following the original owner's death to withdraw the entire balance of the account. Internal Revenue Service rules do not require you to make a withdrawal before the five-year period is up, but you may do so if you wish.
Considerations
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If you inherited a SEP or traditional IRA, you will owe income taxes on the entire amount of the withdrawal. If the balance of the IRA is enough to bump you into a higher tax bracket, you can take smaller withdrawals throughout the five-year period to minimize the tax effect.
Benefits
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Before you close the account, you can buy or sell assets inside the IRA in accordance with your financial goals. You do not need to continue with the securities or investments the original owner purchased with the IRA.
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