What Happens to Your IRA When You Die? A Guide to Inherited IRAs

What happens to your IRA when you die, and how much of that money will your loved ones actually receive? For Springfield families, understanding inherited IRA rules can be an important part of retirement and estate planning. An IRA generally passes to its designated beneficiaries after the owner’s death; however, inheriting a retirement account comes with specific stipulations. Here’s what you and your beneficiaries should know:

Learn more about IRA planning at LaTour Asset Management of Springfield.

Understand the 10-Year Rule for Inherited IRAs

The SECURE Act significantly changed how many beneficiaries must handle inherited retirement accounts. Under the 10-year rule, most non-spouse beneficiaries, including adult children, must fully distribute inherited IRA assets by December 31 of the tenth year following the original owner’s death.

An important distinction involves required minimum distributions (RMDs). If the original owner died after their required beginning date, beneficiaries subject to the 10-year rule generally must also take annual distributions during years one through 9.

Certain beneficiaries, including surviving spouses, eligible minor children of the deceased, individuals with qualifying disabilities or chronic illnesses, and people no more than 10 years younger than the owner, may qualify for different distribution rules.

Know Your Options as a Surviving Spouse

Spouses generally have greater flexibility when inheriting an IRA. Depending on their circumstances, surviving spouses may consider:

• Treating the IRA as their own: An eligible spouse may transfer inherited assets into their own IRA, generally following the distribution rules applicable to their own account.
  
  
• Maintaining an inherited IRA: Keeping the account as an inherited IRA may provide different distribution timing options and access to withdrawals without the usual 10% early-distribution penalty.

Age does make a difference. For example, a surviving spouse younger than 59½ may want to carefully evaluate the consequences of a spousal rollover before making a decision.

Understand How Traditional and Roth IRAs Are Taxed

Not every inherited IRA creates the same tax obligations. With inherited Traditional IRAs,  distributions are generally subject to ordinary income tax, except for any applicable after-tax basis. Taking a substantial withdrawal in one year could potentially increase a beneficiary’s tax liability.

Qualified distributions are generally excluded from federal income tax in an inherited Roth IRA. Keep in mind, the five-year holding requirement can affect whether inherited earnings are taxable.

For beneficiaries subject to the 10-year rule, inherited Roth IRAs generally must be emptied within that period, although annual distributions are typically not required during years one through 9.

Review Your Beneficiaries

An outdated beneficiary designation can complicate an otherwise thoughtful estate plan. Marriage, divorce, the birth of a child, or a death in the family may warrant reviewing who is named on your retirement accounts. Naming a trust can introduce additional distribution considerations, making coordination with an estate planning attorney particularly important.

Make Your IRA Part of Your Legacy Plan

An inherited IRA can represent years of disciplined saving. Understanding the distribution rules may help your family make more informed decisions when the time comes.

At LaTour Asset Management of Springfield, our advisors can help you evaluate IRA beneficiary decisions, retirement distributions, and legacy planning considerations while coordinating with appropriate tax and legal professionals. Call us at (877) 888-5724 to discuss how your IRA may fit into your family’s long-term financial future.