Inherited Ira Distribution

Inherited Ira Distributions come from Individual Retirement Accounts where the owner passed away and had made someone their beneficiary, thereby leaving them the funds held in their IRA. In most instances this is the spouse, but in this day and time with divorces and relationships, that is not always the truth. When IRAs were originally set up, men were the main bread winners of the family and the wife worked at home. IRAs were set up to give the wife continued income when the husband passed away. This is not always currently the case.

With a Traditional IRA, if the spouse is the sole beneficiary, the spouse has the option to treat the Inherited IRA as their own, by making contributions and not taking distributions. If the spouse has their own IRA already established, they may also take the contents of the Inherited IRA and do a Rollover into their own IRA. Distributions are not allowed without a 10% penalty before the age of 59-1/2 unless it is for a first time home purchase or used for education purposes. Of course proof will be required to the IRS of how the funds were actually used.

If the deceased spouse had reached the age of 70-1/2 at the time of death, the surviving spouse must take a Required Mandatory Distribution (RMD) by April 1 of the first year following attaining 70-1/2. If they don't, they will be required to pay 50% in taxes on the amount of the RMD.

If the beneficiary is anyone other than the spouse of an Inherited Traditional IRA, they cannot treat it as their own. They are not allowed to make any further contributions and they are not allowed to do a Rollover into their own IRA. They have no tax liability until they take a distribution from the Inherited IRA. The beneficiary is required to take out the entire amount of the IRA by December 31 of year 5 following the death of the original owner. These are normally taken as 5 equal, annual distributions to minimize the tax implications. There is a second option for the distribution known as over the life of the designated beneficiary. The IRS has created Single Life Expectancy tables that show how long the average person will live. It is dependent on the age of the non-spousal beneficiary as to how many distributions will be required. This method must begin by December 31 of the first year following the death of the original owner. This is usually the preferred method for a younger beneficiary as each distribution can be smaller thereby making the tax liability smaller.

Now we will discuss the Inherited Roth IRA distributions. If the beneficiary is the spouse, they may keep the Roth IRA as it is or rollover into their own Roth IRA. There is no distribution required as taxes were paid at the time of the initial contributions and any earnings are tax free after 5 years.

If the beneficiary of the Inherited Roth IRA is not the spouse, they must take a Full Distribution by December 31 of the 5th year of the original owner's death. These are usually done in equal distributions or if they prefer to use the Single Life Expectancy Table, the distribution must begin by December 31 of the first year following the original owner's death. If the distribution has not begun by December 31 of the first year, then per IRS regulations, it is mandatory that all must be distributed within the 5 year timeline. Either way, none of the distributions are taxable.

With an Inherited Roth IRA there is no Required Minimum Distribution. Any beneficiary of an Inherited IRA should seek the advice of a Financial Planner to maximize the benefit of their inheritance.