What to do if you inherit an IRA as a non-spouse?

What to do if you inherit an IRA as a non-spouse?
17 Jun 2015

575962If you receive an IRA as a spousal beneficiary, you have essentially two options. You can either rollover the inherited IRA to your IRA or cash the inherited IRA out and pay the taxes. However, what do you do if you inherit an IRA as a non-spousal beneficiary?
To answer this question, you need to understand the IRA inheritance rules. Knowing these rules will help you avoid paying higher taxes or forfeit growth. The following list will give you some options on what you can do with the inherited IRA.

1. Transfer the assets to an inherited IRA beneficiary account. RMD rules will still apply for inherited IRA and Roth IRA accounts (Roth IRAs remain tax-free). You generally have until December 31 of the year following the original owner’s death to take your first RMD.

  • If the original owner passes away after age 70½ you must continue to take the annual RMDs from your inherited IRA account.
  • If the original IRA owner passes away before the age of 70½, you can also withdraw from the account using the 5-year rule. This allows you to take distributions without penalty as long as all assets are completely distributed from your inherited IRA by December 31 of the fifth year following the original owner’s death.
  • Make sure the account is registered correctly. If there is more than one beneficiary, see a tax professional.

2. Disclaim (decline to inherit) You have up to 9 months after the original owner’s death and before you take possession to disclaim all or part of the assets.

  • Disclaimed assets will pass to other eligible beneficiaries, if available, or pass in accordance to the provider’s contractual defaults (surviving spouse, estate, etc.)
  • Disclaiming is an irrevocable decision. Be sure to weigh the decision before you disclaim.

Be sure to consult a tax professional first before you make a decision. Nothing is ever as simple as it may seem. Seeking the help of a tax professional can help ensure your wishes are carried out correctly.

Good luck!
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Premier Investments of Iowa are not affiliated. Cambridge and Premier Investments of Iowa, Inc. do not offer tax advice.


Jeffrey Johnston

Jeff has over 30 years of experience in the investment industry. He currently holds his FINRA Serices 6, 63, 66, 7, 24 & 51 licenses with LPL Financial as well as his health and life insurance licenses.