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Your guide to inherited IRA rules

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Charday Penn/Getty Images

Key takeaways of inherited IRAs

Non-spouse beneficiaries
May roll the balance into an inherited IRA and withdraw it within 10 years.

Learn more
Spousal beneficiaries
Have the same options as non-spouse beneficiaries but may also treat the IRA as their own.

Get the details
Child beneficiaries
Normal rules apply unless the child is a minor.

See the summary

If you have inherited an IRA or are listed as the beneficiary of someone's retirement account, learning about inherited IRA rules can help ensure you make the most of that money. It also can help you avoid unnecessary penalties.

Rules are different for different beneficiaries, but each person is subject to only a small portion of the rules, depending on when you inherited the account and your relationship with the original account owner.

Let's discuss what you need to know to effectively navigate the rules for inheriting an IRA.

What is an inherited IRA?

An inherited IRA, sometimes called a beneficiary IRA, is a distinct type of IRA used to transfer a tax-advantaged retirement account to a beneficiary after the original owner has died.

Like any asset or property you might inherit, an inherited IRA or other retirement account comes to you after the death of the original owner. Beneficiaries may choose to withdraw these accounts in a single lump sum, or they may want to roll the balance into a new inherited IRA to take advantage of further tax benefits. Inherited IRAs allow beneficiaries to transfer tax-advantaged retirement savings into an inherited IRA account in their name while keeping those funds separate from any other IRAs they may own, which aren't subject to the same distribution rules.

Types of accounts that may be transferred into inherited IRAs include both Roth and tax-deferred standard, SEP and SIMPLE IRAs. Workplace retirement plans such as 401(k)s and 403(b)s may also be transferred to an inherited IRA in the beneficiary's name.

If you are a retirement account beneficiary, you'll be notified by the financial institution when they receive notice of the owner's death, usually from the estate's executor.

What type of beneficiary are you?

To understand your options for an inherited IRA, it's important to know which type of beneficiary you are. This depends in part on your age, situation and relationship to the original account owner. There are two types of beneficiaries: designated and eligible designated beneficiaries.

Eligible designated beneficiaries

Eligible designated beneficiaries (EDBs) include:

  • The spouse or minor children of the account owner.
  • People who are chronically ill or disabled.
  • Someone not more than 10 years younger than the account owner.

Designated beneficiaries

A designated beneficiary (DB) is any person named as the beneficiary of an IRA who isn't an eligible designated beneficiary.

Let's go through an overview of the different options available.

An overview of inherited IRA options

Inherited IRA rules for non-spousal beneficiaries
As a non-spouse beneficiary, you generally will be required to withdraw the full balance of the account within 10 years, assuming you are not an eligible designated beneficiary. You can do this by taking a single lump sum all at once, or you can roll the account into an inherited IRA and take distributions over 10 years.

If the original account owner had already begun taking RMDs, you'll need to continue taking RMDs. If the original account owner had not reached the age to begin RMDs, you can take distributions any way you prefer as long as the full balance is withdrawn within 10 years.

Eligible designated beneficiaries have additional options, including withdrawing the account over their own remaining life expectancy.

Inherited IRA rules for spouses
If you're a spousal beneficiary, the rules are more generous. You may choose any option available to other types of beneficiaries, such as withdrawing the account as a single lump sum or rolling it into an inherited IRA.

However, spousal beneficiaries may also transfer IRAs they inherit from a spouse into their own IRA. This would mean the money is subject to standard IRA rules, with no requirement to continue the deceased spouse's IRA or withdraw the account in 10 years.

However, if an RMD was mandatory at the time of death, you'll need to remove that amount before transferring the balance.

Inheriting an IRA from your parent
If you inherit an IRA from your parent, you're generally considered a designated beneficiary. This means you're required to either take a lump-sum distribution or roll the money into an inherited IRA and follow the appropriate rules discussed.

However, if an eligible designated beneficiary is a minor child of the deceased, it's a special situation. These beneficiaries are able to take distributions based on their remaining life expectancy but only until they reach majority (currently age 21 for all states per the SECURE Act 2.0). Then they switch to a 10-year method. For years one through nine of that 10-year period, they continue to take RMDs, and all remaining money must then be distributed by Dec. 31 of the 10th year after reaching majority.

Know the rules that apply to you

If you inherit an IRA, your options differ depending on the type of beneficiary you are and your relationship to the person who left you the IRA. The rules are not complicated, but it's important to follow them correctly and make the most of the potential tax benefits and avoid penalties.

For help sorting out how an inherited IRA fits into your plan, contact a Thrivent financial advisor.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.