Rules For Inherited IRAs That May Surprise Non-Spouse Beneficiaries
Many IRA assets will ultimately be passed on to non-spouse beneficiaries. But inheriting an IRA comes with unique rules and regulations that may surprise you. Inherited IRAs differ significantly from your personal IRA accounts. Below, we outline seven important rules for inherited IRAs that non-spouse beneficiaries need to know.
7 Key Rules for Inherited IRAs for Non-Spouse Beneficiaries
1. You Cannot Contribute to an Inherited IRA
Contributions are not allowed in an inherited IRA. Additionally, you cannot combine funds from your personal IRA with your inherited IRA, ensuring the accounts remain separate.
2. You Can Move Your Inherited IRA
If you’re dissatisfied with your inherited IRA’s custodian or investment options, you can transfer the account. However, the transfer must be direct, and the new account must also be an inherited IRA. Unlike traditional IRAs, non-spouse beneficiaries cannot perform a 60-day rollover.
3. You May Qualify for a Qualified Charitable Distribution (QCD)
For those aged 70 ½ or older, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 annually from your inherited IRA directly to a charity tax-free. This option is ideal for those with philanthropic goals.
4. No Conversions to Roth IRAs Allowed
Unfortunately, non-spouse beneficiaries are prohibited from converting inherited IRAs into Roth IRAs. This restriction is important to keep in mind when planning your financial strategy.
5. Be Prepared for Required Distributions or the 10-Year Rule
For IRAs inherited in 2020 or later, non-spouse beneficiaries are generally required to withdraw all funds within 10 years. Some cases may involve annual required minimum distributions (RMDs) during this period. Certain eligible designated beneficiaries and those who inherited prior to 2020 may still qualify for life expectancy-based RMDs.
6. Distributions May Be Taxable, but No Penalty Applies
While distributions from traditional inherited IRAs are taxable, they are not subject to the 10% early withdrawal penalty. Beneficiaries of Roth IRAs are in a better tax position, as distributions from these accounts are typically tax-free.
7. Name a Successor Beneficiary
When inheriting an IRA, naming a successor beneficiary is critical. Without one, the funds may default to your estate, potentially triggering unnecessary taxes and probate proceedings.
Optimize Your Inherited IRA Strategy
Understanding these rules can help you make informed decisions about your inherited IRA and avoid costly mistakes. Consulting with a financial advisor is recommended for personalized guidance.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.