An inherited IRA is more complicated for heirs who are not a surviving spouse.
An IRA is an important source of income in retirement.
For this reason, they are often significant assets in estate planning.
With the recent passage of the SECURE Act, how IRAs are passed to heirs has become more complicated.
No surprise there.
According to a recent Sentinel Source.com article titled How to manage an inherited IRA from a parent,” non-spousal beneficiaries require more strategic planning to minimize tax burdens.
Adult children should not simply roll over an inherited IRA into their own account or use the IRA as if it is their own.
They must instead create a new IRA under very particular specifications.
The IRA should be titled as an “Inherited IRA” and should include the name of the original owner and the phrase “for the benefit of (name of heir).”
Institutions vary when it comes to the specific titling language used, making it important to follow each detail required.
What happens if the traditional IRA has multiple beneficiaries?
Each beneficiary will need to have a separate account.
Each will then treat their portion as if they were the sole beneficiary.
In addition, each beneficiary can decide whether to create a new Inherited IRA Beneficiary account with the original institution or with a new institution.
Often beneficiaries find it simpler to use the same institution or advisor.
There may be costly penalties associated with poor handling of an inherited IRA.
With very limited exceptions, beneficiaries who are not spouses must remove all funds within ten years of the death of the original owner of the IRA.
Although beneficiaries can make withdrawals as they choose during these years, distributions from the accounts will be fully taxable as ordinary income.
If the original account owner died after December 31, 2019, these inherited IRA rules applie.
How is this different from previous legislation on IRAs?
Beneficiaries who were not spouses had no time limit on withdrawals.
This was known as a “Stretch IRA.”
Because the funds from the inherited IRA were able to grow tax-deferred over the lifetime of the beneficiary, more wealth could be generated for the beneficiary and the remaining funds could even be passed to a third generation.
Are there exceptions to the new inherited IRA withdrawal rules?
Minor children, surviving spouses, chronically ill or disabled beneficiaries, or beneficiaries who are fewer than ten years younger than the original account owner will be allowed more time to withdrawal the funds.
Spouses also may have the benefit of transferring the remaining balance into their own IRA accounts and delay taking distributions until they reach age 72.
Working with an experienced estate planning attorney in tandem with an experienced financial advisor is the best way to create a plan for an inherited IRA.
Reference: Sentinel Source.com (Sep. 18, 2021) “How to manage an inherited IRA from a parent”