Financial advisor counsels IRA withdrawal

When You Must Withdraw From An Inherited IRA

When you inherit jewelry, real estate, or other tangible assets, it is easy to figure out what to do with your inheritance. When you inherit an individual retirement account (IRA), it can be harder to determine what to do with it. One of the biggest questions many people have concerns when they must withdraw from an inherited IRA. You may also wonder how much you must withdraw, whether your withdrawal will be taxed, what kinds of penalties you may face, and many other questions. Inheriting an IRA from a loved one can be a generous windfall that provides financial security, but it can also be confusing and worrying to make sure you follow all the rules. If you have inherited an IRA and are wondering what you need to do with it, consider speaking with one of the experienced attorneys with Roulet Law Firm, P.A. at our Minnetonka, Minnesota office at (763) 420-5087 or our Venice, Florida office at (941) 909-4644 to learn more about your legal options.

Do You Have To Withdraw From an Inherited IRA?

The short and simple answer is yes, you do have to withdraw from an inherited IRA. The longer answer is that while you do have to make withdrawals, when, how, and how much you must withdraw depend on several factors. There is not a single amount that applies to every inherited IRA.

Withdrawals may be as regular distributions, or an individual may choose to roll withdrawals over into their own IRA. Those regular distributions may take place over the individual’s lifetime or following the 10-year rule. Additionally, eligible designated beneficiaries and designated beneficiaries have different rules regarding IRA withdrawals.

Does an Inherited IRA Have To Be Distributed in 10 Years?

The rules for how to handle an inherited IRA and when you must withdraw from an inherited IRA changed between 2019 and 2020 with the passing of the SECURE Act. The SECURE Act was intended to make saving for retirement easier. In 2022, Congress updated the SECURE Act by passing the SECURE 2.0 Act. SECURE 2.0 expanded retirement savings options, increased the age at which retirees are required to start withdrawing funds from some retirement accounts, reduced penalties for untaken withdrawals, and made withdrawals easier under certain circumstances.

The new rules provide guidance for eligible designated beneficiaries and designated beneficiaries. Understanding these two categories can help you to also understand how the rules apply.

Eligible Designated Beneficiaries

The Internal Revenue Service (IRS) defines an eligible designated beneficiary as:

  • The account holder’s spouse or minor children
  • Chronically ill or disabled individuals
  • Individuals who are younger by 10 years or less than the original account holder

Eligible designated beneficiaries of an inherited IRA are exempt from having to deplete the account within 10 years. These beneficiaries can take annual withdrawals based on their life expectancy.

Designated Beneficiaries

A designated beneficiary is any individual not meeting any of the eligible designated beneficiary criteria above who is named as a beneficiary to an IRA. Designated beneficiaries are required to withdraw or distribute the entire account by the end of the tenth year following the year of the account owner’s death. This applies regardless of whether the account owner died before or after reaching the required beginning date (RBD) when the original owner would have been required to start making required minimum distributions (RMD). This is called the 10-year rule.

How Long Do You Have To Pay Out an Inherited IRA?

Eligible designated beneficiaries may choose to take distributions over the longer of their own life expectancy or the original owner’s life expectancy. They may also choose to follow the 10-year rule to empty the account within 10 years. If you are uncertain about which choice to make, Roulet Law Firm, P.A. may be able to help you better understand the consequences of each choice so you can better evaluate your options.

Designated beneficiaries, which are not the same as an eligible designated beneficiary, are required to follow the 10-year rule. The requirements for designated beneficiaries are therefore somewhat simpler, but also more restrictive, than those for eligible designated beneficiaries.

How Do You Calculate the Required Minimum Distribution From an Inherited IRA?

The RMD from an inherited IRA may not be the same as the RMD for the original account owner. There are several factors used to determine the amount that an individual must withdraw from an inherited IRA. Some of these factors include the beneficiary’s age, their relationship to the account owner, how old the account owner was when they died and whether they were required to take RMDs, and the account value.

The amount for the RMD is also dependent on whether the beneficiary is opting to take distributions based on their life expectancy or on a schedule to deplete the account within 10 years. In some cases, beneficiaries may also choose to rollover the inherited IRA into their own IRA or to make a lump-sum distribution. Beneficiaries should also consider the tax implications of each of their options, as some options may require paying taxes while others may not.

Do the Same Rules Apply to an Inherited 401(k)?

IRAs and 401(k)s are similar in that both types of accounts help individuals plan for retirement. An IRA is a retirement account that any individual can open at any financial institution that offers them. A 401(k) can only be opened when an individual works for a company that offers the plan. When the individual leaves the company, they are then required to roll the money in the 401(k) over into another 401(k) or into an IRA that they open elsewhere.

While the rules applying to an inherited 401(k) are similar, they are not exactly the same as those applying to an inherited IRA. If an individual has inherited a 401(k) or is not sure what kind of account they have inherited, they may want to consult with an attorney to clarify the type of account and what is required of them.

Do You Need Help Navigating Your Inherited IRA?

With different rules for different beneficiaries, and multiple options for making withdrawals, inheriting an IRA can be a welcome yet intimidating windfall. If you would like to learn more about how to protect your retirement accounts, give us a call today at our Minnetonka, MN office at (763) 420-5087 or our Venice, FL office at (941) 909-4644.
Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker
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