Ask Terry Questions Inherited IRA

Inherited IRA

By Terry Savage on September 23, 2019 | Financial Planning / Retirement

I inherited and IRA from my dad when he passed away; do I have to take the yearly disbursement or can that be rolled over? Thanks Roy

Terry Says

This is such a complicated question — and depends a lot on your Dad’s age when he passed, and whether he had started taking his required minimum distributions (RMDs) — that I am going to refer you directly to a great article at the Fidelity website for non-spousal beneficiaries.  The rules are different if you are a spousal beneficiary.

Here’s a key paragraph from that article:

The IRS generally requires non-spouse inherited IRA owners to start taking required minimum distributions (RMDs) beginning December 31 after the year of death of the original account owner, and each year thereafter. Also, distributions from inherited IRAs taken before age 59½ are not subject to a 10% early withdrawal penalty in most cases.

But you may be able to calculate the amount of those RMDs in different ways, using your own life expectancy or the decedents, depending on whether RMDs had already started. 

Again, with full  credit to the linked Fidelity article, I’m going to cut and paste two paragraphs to show you how complicated this can be for a non-spousal individual beneficiary!  Get some help on this from the custodian of the IRA account.

If the original IRA owner died after reaching age 70½, then you may elect to calculate those RMDs by using your own age (see the discussion above) or by using the original IRA owner’s age in their year of death. This option may be advantageous if the original IRA owner was younger than you. For subsequent years, the life expectancy factor is derived by subtracting one for each year.

If the original IRA owner died before reaching age 70½ (before RMDs would be required of the original owner), you also have the option of distributing your inherited IRA under the 5-year rule. This allows you to take distributions however you like without penalty, so long as all assets are completely distributed from your inherited IRA by December 31 of the 5th year following the IRA owner’s death. Discuss with your tax adviser the potential tax implications of this accelerated withdrawal schedule.

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