What Are the IRS Rules Regarding an IRA That Is Inherited?

By Stephanie Powers

  • Overview

    Careful estate planning controls how IRA funds are distributed to beneficiaries. Beneficiaries must understand the rules to avoid income taxes and estate taxes on IRA distributions.
  • Facts

    IRA assets pass to the beneficiaries listed on the account at the time the owner dies. The funds pass without going through probate court.
  • Relationship of the Beneficiary

    The rules regarding inherited traditional IRAs differ depending on the relationship of the beneficiary to the deceased. Spousal beneficiaries have more control over inherited IRAs. Spouses who inherit the entire account can choose whether or not to treat the IRA as their own or keep the original owner's name on the account and treat it as a decedent IRA. Taking ownership of the IRA allows new contributions and the required minimum distribution is calculated based on the spouse's age, not the deceased's age. As the new owner, the IRA and any distributions from it can be rolled into the surviving spouse's retirement account. If the spouse chooses not to take ownership, but remain a beneficiary, no new contributions can be made and the required minimum distribution is calculated based on the deceased's birth date. Non-spouses, charities, estates and other organizations who inherit IRAs cannot become the owner, make contributions or rollover the IRA. For IRAs with non-deductible contributions, the basis of the account determines how much of distributions are taxable. The account must be liquidated within 5 years of the original owner's death. If the IRA receives income after the death of the original owner, the beneficiary may claim an estate tax deduction for distributions up to the amount of income earned. Trusts cannot be listed as IRA beneficiaries, but the trust administrator can provide information to the IRA custodian to implement the transfer of ownership to the intended beneficiaries, as long as proper documentation is provided. Inherited Roth IRAs follow the same rules as traditional IRAs, except: distributions to beneficiaries made less than 5 years after the funds were contributed to the IRA are considered non-qualified and are taxable to the beneficiary.

  • Required Minimum Distribution

    If the deceased died after age 70 ½ the beneficiary can decide to either calculate distributions based on the deceased's life expectancy or an individual beneficiary's life expectancy. If the deceased died before age 70 ½, the required minimum distribution is based on the beneficiary's life expectancy. IRS life expectancy tables can be found at the IRS website (see Resources).
  • Considerations

    Beneficiaries can deny claims to an IRA. The account then passes either to secondary beneficiaries or to the decedent's estate. If no beneficiaries are listed on the account, all assets pass to the estate and are disbursed according to state laws.
  • History

    IRA inheritance rules, as documented in IRS Publication 590, were designed to provide orderly transfer of assets to beneficiaries (see Resources). The rules also control whether or not distributions to beneficiaries are taxable and how much control the beneficiary has over the account.
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