By Vincent R. Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove.

You may have noticed that Inherited IRAs have been a trending topic in recent months.  What’s the buzz about?   Here are 3 key things to know about them.

What is an inherited IRA?

An inherited IRA is an individual retirement account opened for a beneficiary after the original owner dies. The new owner could be a spouse, family member, unrelated person, trust, estate, or non-profit organization.

What are the rules for distributing and managing an inherited IRA following the death of the original account owner?

There are two sets of rules for beneficiaries. One set applies to spouses; non-spouses have different options.

For spouses of the original account owner, the rules will vary based on the account type (Traditional or Roth IRA):

  • Traditional IRA – three of the most popular options (amongst a few others available):
    1. Designate yourself as the account owner.
    2. Roll the inherited account – tax-free – into an IRA you already possess. If you have a retirement plan through your employer, you can roll the inherited IRA into that account as well.
    3. Transfer the funds into an inherited IRA.
  • Roth IRA – again, three of the most popular options (amongst a few others available):
    1. Withdraw any or all of the account proceeds, tax & penalty free, provided the account has existed for at least five years.
    2. Transfer the funds to an existing Roth IRA.
    3. Open a new Roth IRA and transfer the funds to this new account.

If you are not the spouse of the deceased original owner – a parent might bequeath you their IRA, for example – you can transfer the account into a new inherited IRA account.

You then have the following two options:

  1. Take a lump sum distribution. With traditional IRAs, withdrawals are taxable income. However, withdrawals from Roth IRAs are tax-free if the account was open for at least five years.
  2. Transfer the account funds to an inherited IRA held in your name.

Are there any time limits for withdrawing funds from an inherited IRA?

If you are the spouse of the decedent, you may retain funds within the inherited IRA throughout your remaining lifetime. This is commonly known as the “stretch IRA.”  Note that you will be required to take annual Required Minimum Distributions (RMDs). The RMD calculation can vary depending on if you (the surviving spouse) are the sole beneficiary of the IRA and if the decedent (the original account owner) had already begun taking RMDs before their death.  Specifically, in this case, the spouse beneficiary can elect to either use the decedent’s age or their own to determine the annual RMD amount.  These annual distributions are taxed for an inherited traditional IRA.

Conversely, non-spouse beneficiaries who inherit an IRA in 2020 or later must now withdraw all funds within 10 years of the original owner’s death. There are a few exceptions to this; for example, beneficiaries that are disabled individuals or minors. This new 10-year limit was implemented as part of the 2019 passage of the SECURE Act. Annual RMDs are not required within this 10-year period.  The IRS earlier this year created considerable confusion on whether annual RMDs are required.  They later clarified that they are not.

Questions about all the ins and outs of inherited IRAs? Please contact your HH advisory team. We’ll be happy to help.

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Disclaimer

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice.

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