What is an Inherited IRA?
An Inherited IRA is a retirement account that a beneficiary receives when the original account holder passes away. Often known as a “beneficiary IRA,” this account allows the beneficiary to continue receiving tax-deferred growth on the assets. However, there are specific distribution rules and timelines that vary depending on the beneficiary’s relationship to the original account holder and the type of IRA inherited, whether a Traditional or Roth IRA.
When inheriting an IRA, beneficiaries are typically required to start taking minimum distributions by the end of the year following the original owner’s death. This rule prevents beneficiaries from indefinitely deferring taxes on the account. However, the IRS allows certain flexibilities. For example, surviving spouses who inherit an IRA have more options, including the ability to treat the inherited IRA as their own, allowing them to defer distributions until they reach retirement age. Non-spousal beneficiaries, on the other hand, may need to withdraw all assets within a 10-year period, especially under recent changes established by the SECURE Act.
Inherited IRAs provide the benefit of continued tax-deferred or tax-free growth, depending on whether the original account was a Traditional or Roth IRA. Beneficiaries should consider the potential tax implications of distributions, especially if they are within a higher income bracket. This is particularly important for senior beneficiaries who may already be managing other retirement income sources, as required withdrawals from an inherited IRA can increase their taxable income.
For those receiving a life insurance payout alongside an inherited IRA, financial planning strategies can help manage the timing and tax impact of distributions. It’s crucial for beneficiaries to work with financial advisors to ensure compliance with the rules and optimize the financial benefits of an inherited IRA.
