Retirement

Inherited IRA Rules: Distribution and Beneficiaries | Charles Schwab

If you inherit a Roth IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options. Option #1: Open 
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If you inherited an IRA from someone other than your spouse, there are different withdrawal rules depending upon the type of beneficiary you are (Eligible Designated Beneficiary or Designated Beneficiary).

Eligible Designated Beneficiaries that are not the spouse include:

  • Minor children of the original account holder (decedent)
  • Those that are chronically ill
  • Those that are permanently disabled
  • Those that are not more than 10 years younger than the original account holder (ie – a sibling or friend that is age 60 when the account holder was age 69)

Designated Beneficiaries

  • If you do not meet the requirements to be considered an Eligible designated beneficiary, then if the account holder died after 2019, you will be required to fully distribute all assets by the end of the tenth year after the year the account holder died.
  • Note: If the original account holder did not take an RMD in the year of death and they were required to, an RMD must be taken from the account by 12/31 of the year the original account holder died.

Eligible Designated Beneficiary Options (other than a spouse)

Traditional: Non-spouse inherits

  • If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA and are considered to be an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options.

If the account holder was under 72, these are your choices:

Option #1: Open an Inherited IRA: Life expectancy method

Account type You transfer the assets into an Inherited IRA held in your name. Money is available

RMDs must begin no later than December 31 of the year after death.

Other considerations

  • Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year.

Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns that age of majority. At that point, the distribution option is required to switch to the 10 year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns the age of majority.

  • If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary.
  • Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred.
  • You may designate your own IRA beneficiary.

Option #2: Open an Inherited IRA: 10 year method

Account type The assets are transferred into an Inherited IRA held in your name. Money is available At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. Other considerations

  • You are taxed on each distribution.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-deferred for up to ten years.
  • You may designate your own IRA beneficiary.

Option #3: Lump sum distribution

Account type None. All assets in the Inherited IRA are distributed to you. Money is available All at once. Other considerations

  • You will not incur the 10% early withdrawal penalty.
  • You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

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