When You Inherit an IRA

In the first quarter of 2017, Americans owned just under $8.2 trillion in IRA assets. Some of these IRAs will transfer to beneficiaries one day. When spouses are the beneficiaries, complications are typically minor, as they can roll over the account. But when non-spouses become IRA beneficiaries, they have to consider a number of factors.

Watch Your RMDs

Individuals who own an IRA typically must begin required minimum distributions (RMDs) by April 1 of the year after they reach age 70½. If you inherit an IRA, the rules are different.

Let’s say you inherit an IRA from someone other than your spouse in 2018. You can take RMDs in one of two ways. You could take the entire account within five years of the owner’s death. Or you could “stretch” the inherited IRA based on your life expectancy, not the owner’s. If you choose the second option, you have up to a year after the IRA owner’s death to begin RMDs.

Str-r-r-r-etch Your RMDs

In the second scenario, calculate your RMDs by dividing the expected number of years left in your life, as determined by the IRS’s uniform lifetime tables, into the account balance. A longer life expectancy equals longer and smaller payments, giving your IRA more time to use compounding to grow the account.

Complications Ahead

If you are a non-spousal IRA beneficiary along with a charity or trust, you have different options. When a non-person is among the beneficiaries, the five-year rule to spend down the account applies to all beneficiaries if the IRA owner died before age 70½. If the death occurred after that age, beneficiaries must take RMDs by calculating the owner’s life expectancy.

A couple of other caveats: First, make sure you properly re-title the inherited IRA. Second, non-spouses cannot rollover an inherited IRA. Talk to your tax professional if you inherit a non-spousal IRA.