What Happens After Inheriting an IRA or Roth IRA?

What Happens After Inheriting an IRA or Roth IRA?

The Individual Retirement Account (IRA) first came into existence over four decades ago, followed in 1997 by its lesser known sibling, the Roth IRA. Fast forward to present day, as the original owners of these accounts continue to age and eventually pass away, these valuable retirement planning vehicles are steadily transitioning into Inherited IRA and Inherited Roth IRAs. For the millions of people named as beneficiaries of these accounts, there is often confusion about what happens after they inherit the retirement assets. Presented below is a breakdown of important current rules for Inherited IRAs/Roth IRAs.

Let’s first address Traditional (or “Regular”) IRA assets. If the beneficiary is the decedent’s spouse, then the surviving spouse can take full ownership of the IRA assets as if they were his or her own and then treat it that way going forward. For any other person or entity named as beneficiary, the IRA assets must be distributed into a newly created Inherited IRA.

The next step is to determine if the original IRA owner was over the age of 72 at the time of death. If yes, then a current year Required Minimum Distribution (RMD) must be satisfied prior to transferring the assets into either the spouse’s IRA or an Inherited IRA. The distribution amount of this final RMD is based on the life expectancy of the original account owner.

For Inherited IRAs, the new owner will be required to completely draw down the balance of the account by December 31 of the 10th anniversary of the original owner’s death. This a significant change from prior law, which allowed distributions to be made over the lifetime of the Inherited IRA account owner. The SECURE Act of 2019 instituted this new 10-year rule, and it also pushed back the Required Minimum Distribution age for Traditional IRAs from 70 ½ to 72. Importantly, whereas previously RMDs were required annually from an Inherited IRA account, the new 10-year rule means the Inherited IRA account owner can draw down the account at any point in those 10 years, and even defer any distributions until the 10th year, as long as the account is fully distributed by the end of that 10th year.

For Inherited Roth IRAs, mandatory distributions are also required and the same 10-year rule applies. All distributions from an Inherited Roth IRA are income tax free to the account owner and assets that remain inside the Inherited Roth IRA continue to grow tax free during those 10 years. Note, traditional Roth IRAs are not subject to Required Minimum Distributions, but Inherited Roth IRAs are.

With the aggregate value of retirement assets in the U.S. continuing to increase, and with the Baby Boomer generation continuing to age, it is no surprise that Inherited IRAs and Inherited Roth IRAs are becoming more prevalent. In particular, for those many non-spouses named as beneficiaries, it is important to understand the impact that this can have. Your Sand Hill Wealth Manager is ready to work proactively with you and your tax professional to plan for your unique personal circumstances.

Source: Internal Revenue Service

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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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