What You Need to Know About Receiving an Inherited IRA
Taxes and financial planning are likely among the last things on your mind after the death of a loved one. But inevitably, and sometimes unexpectedly, these topics come up.
Receiving an inherited IRA is a common example of one of these moments. If you've never encountered this situation before, you may have some questions about how to proceed. Here's what you need to know about getting the process started.
Inheriting an IRA can provide needed financial relief to your family, but it also requires a little more planning than it would if you simply received the inheritance in cash. The laws around receiving an IRA vary depending on your relationship with the person who left it to you and the type of IRA.
Inheriting from a spouse
If you're the sole beneficiary of an IRA you inherit from your spouse, you can take over the account as your own by a few different methods. These include designating yourself as the owner, rolling the account into an IRA that you already have or rolling it over into a new IRA. Once you take over the account by one of these methods, the IRS will treat the IRA as if it's always been yours, and regular rules about withdrawals and contributions will apply.
You can also choose to take a lump-sum distribution of the account and cash it out entirely. However, with this option you'll owe taxes on the distribution amount.
Inheriting from someone else
If you inherit an IRA from someone who isn't your spouse and you're not designated as the sole beneficiary, you can roll it over into an inherited IRA account. In this case, you'd title the account with the name of the person who left it, with your name as the beneficiary—the other beneficiaries can do the same with their portion of the IRA. You can't make additional contributions to the account, and in most cases, you'll need to make withdrawals within 10 years.
There are no restrictions on how much you withdraw at a given time, but you'll owe ordinary income taxes on money that you take out. After the 10th year, you'll be required to withdraw whatever's left in the account and pay taxes on it.
There are a few exceptions to the requirement to make withdrawals within 10 years. For example, it may not apply if you're disabled or if you're not 10 or more years younger than the person who left you the account. For minors, the 10-year period doesn't start until they reach adulthood.
Inheriting a Roth IRA
If someone has left you a Roth IRA, you can make withdrawals tax-free at any time as long as the account has been open for 5 years. For accounts less than 5 years old when the owner died, you can make tax-free withdrawals on contributions, but you'll owe taxes on any earnings.
When you've lost someone close to you, questions around their finances can add to the uncertainty that already surrounds this difficult time. Knowing the rules around an inherited IRA will help you understand what to do and take the right steps, so you can focus on the things that matter most. If you're still unsure, it's a great time to check in with a financial advisor and ask for their advice. They will work with you to find a course of action that best fits your individual situation.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.