Inherited Ira Rules

The IRS has strict guidelines or Inherited IRA s. The Inherited IRA Rules for spouses are as follows:

1) A spouse is allowed to treat an Inherited IRA as their own IRA. They are allowed to make contributions as allowed by law.

2) A spouse may take the Inherited IRA and do a Rollover into another IRA that belongs to them. The only limitation on the Rollover is it must be the same type of IRA, i.e. Traditional to Traditional or Roth to Roth.

3) A spouse does not have to take distributions unless they have attained the age of 70-1/2. Required Mandatory Distributions begin at the age of 70-1/2 no matter whether it is the their IRA or the Inherited IRA.

Rules for a non spouse are a little different. The Inherited Rules for a non spouse are as follows:

1) A non spouse is not allowed to treat an Inherited IRA as their own. They are not allowed to make any contributions to it.

2) A non spouse may not rollover into another IRA even if it belongs to them. It does not matter than they own another IRA matching the Inherited IRA.

3) A non spouse must make distributions according to the IRS Guidelines. The entire amount of an Inherited IRA must be taken out by December 31 of the 5th year following the death of the original owner. That rules applies unless the non spouse beneficiary elects to use the Single Life Expectancy table provided by the IRS. This means the non spouse beneficiary is allowed to take the entire amount as distributions over their own lifetime as calculated by the IRS thereby decreasing their tax liability per distribution. This must be begun by December 31 of the first year following the death of the original owner. If these rules are not followed, the non spouse may be charged a 50% tax rate for failing to abide by the Rules of an Inherited IRA. Also, if the first year rule is bypassed, the 5 year timeline will automatically go into affect.

Whether it is a spouse or non spouse who inherits an IRA, it is strongly recommended that a Financial Planner be contacted. A Financial Planner can give the beneficiary much needed advice on the most efficient way to handle their inheritance. Be wise. Be careful. Be prudent.