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I want to say first that the rules and regulations regarding an inherited IRA are extremely complex, and the consequences for making a mistake in regards to the inherited IRA can be disastrous.
As with advice in all financial matters, please contact a qualified financial expert to help navigate through this very technical process.
There are essentially three types of inherited IRA’s. First is the IRA where the spouse is the named beneficiary. The second is an IRA where the spouse is not the beneficiary. The third and final type of inherited IRA is one left to a trust or charity. The rules are quite different for each.
Spousal Inherited IRA Options
1. Roll over the inherited IRA assets into your own new or existing IRA and use your age to determine the required minimum distributions. Rolling over your inherited IRA assets can make good sense if you have not yet obtained the age of 70½, but your spouse had. This strategy gives you a chance to stretch out the tax-deferral of IRA assets by putting off distributions until you turn 70½. If you are not yet 59½, however, and you aim to take a distribution from your IRA, you will be subject to a 10% penalty for early withdrawal on the IRA but would not be subject to a 10% penalty in an inherited IRA.
2. You may transfer the inherited IRA assets from your spouse to an inherited IRA distribution account. The amount of your required minimum distributions will be based on your age and be recalculated each year. The timing of the first distribution may be based on your spouse's age at the time of his/her death. This method may make sense if you're older than your spouse, and your spouse died before age 70½. This is because this alternative would allow you to delay taking the minimum required distributions until the year your spouse would have turned age 70½
3. If you believe that you will not need the inherited IRA assets during your lifetime, you may want to decline to inherit all or part of your IRA assets. Your declined portion would then be passed on directly to the next qualified beneficiaries. Any required distributions would not be based upon your age, but the new beneficiary’s age instead. If you don't need these assets and you'd like to see a beneficiary in the next generation to be able to make the most of tax-deferred growth, this might be an attractive option for you.
Non-spousal Inherited IRA Options
1. You may choose a transfer of your inherited IRA assets into an inherited IRA. This is performed by a trustee-to-trustee transfer. You then will be in charge of both to whom and how your inherited assets are invested. Your minimum required distributions will also generally be based on your own life expectancy. If you're sharing inherited IRA assets with other beneficiaries, you should establish your own inherited IRA for your share of the assets.
2. You may obtain a cash distribution for the entire IRA amount. In order to take this distribution, the assets must first be transferred to you by means of an inherited IRA. Your distribution is includable in your tax gross income and will be subject to Federal ordinary income taxes. This amount will also be subject to state taxes as well. This account is not entitled to be rolled over into another IRA or employer sponsored retirement plan.
3. If you believe that you will not need the inherited IRA assets during your lifetime, you may want to decline to inherit all or part of your IRA assets. Your declined portion would then be passed on directly to the next qualified beneficiaries. Any required distributions would be based on the new beneficiary's age, instead of your own. If you don't need these assets and you'd like a younger beneficiary to be able to make the most of tax-deferred growth by stretching distributions out over the new beneficiary’s life.
Trust or Charity Inherited IRA Options
An IRA owner may name a trust or charity as the account's beneficiary. These organization beneficiaries will transfer their inherited IRA assets to a distribution account.
1. When the beneficiary is a qualifying trust, the trust's eldest beneficiary will be considered to be the IRA's designated beneficiary for the purposes of computing the required minimum distribution computation purposes. Also, the trust should qualify as a look-through trust. To do this, a few things must be present:
2. When the beneficiary is a charity or non-qualified trust and the IRA owner was living on April 1 of the year after turning 70½, IRS minimum required distributions are based on the remaining life expectancy of the IRA owner as if he or she were still living. If the owner was less than 70½ when he or she died, the assets must be entirely distributed by December 31 of the fifth year following the year of the IRA owner's death.
Again, there are many pitfalls regarding inherited IRA issues, so please consult a CPA or a tax attorney for help on these matters.
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