If you’ve inherited a traditional IRA from someone other than your spouse ‒ say, an elderly parent or grandparent ‒ you may be overwhelmed at first. But once you collect yourself, it’s important to review all your options, taking your personal circumstances into account.
Non-Spouse Beneficiary Options
Although a non-spouse beneficiary doesn’t have the same flexibility as a spousal beneficiary (i.e., you can’t roll over funds into your own account), you still have three main options:
- Withdraw funds over five years. If the deceased owner is under age 70½, you can take up to five years to empty out the IRA, beginning in the year following the year of death. Under the usual IRA rules, you’re taxed at ordinary income rates in the year distributions are received.
- Take out RMDs under your life expectancy. Normally, a taxpayer must begin taking required minimum distributions (RMDs) from an IRA after age 70½. Assuming you’re younger than the deceased IRA owner and RMDs have not begun, you can take RMDs based on your own life expectancy, resulting in smaller annual RMDs. To qualify for this “stretch IRA” option, you must establish an IRA beneficiary distribution account by December 31 of the year after the year of death.
- Take a lump-sum distribution. When it suits your purposes, you can cash in all the IRA assets. Of course, the full amount is taxable in the year of receipt, so this will likely result in higher taxes than if distributions had been spread out over several years, especially if you’re bumped into a higher tax bracket.
What happens if you do nothing? If RMDs have not begun, you must deplete the account within five years, as described in Option #1. Better idea: Explore your options and make a well-informed decision.