Inherited IRA from a Non-Spouse
From: www.thebalance.com
Inherited IRA Rules for Non-Spouse Beneficiaries
As the U.S. population ages, it is common to inherit an IRA from mom or dad, an aunt or uncle, or even a sibling or friend. This often happens when you are in or near retirement. You have a few choices on how you treat this IRA. (If you inherited an IRA from your spouse different options apply so see the article Inherited an IRA from my Spouse.)
Many people think they can roll an inherited IRA into their own IRA. Unfortunately, if you inherited an IRA from someone who is not your spouse you cannot roll the account into your own IRA or treat the IRA as your own. Instead, you must choose from the options outlined below.
Cash in the IRA Now – Or Within 5 Years
You always have the option of cashing in an inherited IRA. You will pay taxes on the amount of the distribution, but no 10% IRA early withdrawal penalty tax. If you choose this option you must cash in the entire inherited IRA by December 31st of the fifth year following the original IRA owner’s death. Although no penalty tax applies, this may not be your best option. Cashing in a large IRA could mean anywhere from 25% – 39.6% of it goes right to federal taxes. State income taxes will apply too. For this reason, you may want to consider option 2 below.
Stretch Out Your Withdrawals
To take withdrawals out slowly, you can set up what is called an “Inherited IRA” account with you as the beneficiary. As a beneficiary, you must take minimum distribution amounts from the inherited IRA each year according to your life expectancy using a specific set of rules. These distributions are called Required Minimum Distributions and are frequently referred to as RMDs. This option of taking withdrawals over your life expectancy is frequently referred to as a “Stretch IRA”. The nice thing about this option is that you can always withdraw the money faster if needed.
The rules simply dictate the minimum you must withdraw. Withdrawing more than the minimum is always ok.
