As the beneficiary of an inherited IRA, you have a decision to make about how and when you will begin to take distributions:
Do you need the assets now, or would you prefer to maintain the IRA’s tax-deferred status as long as possible?
Some factors that impact your options will be beyond your control, such as your relationship to the original account owner, whether or not they had already begun to take required minimum distributions (RMDs), and if there are multiple account beneficiaries. Others, however, including your immediate and future cash flow needs, when you plan to retire, your long-term goals, and access to other sources of retirement income, will help determine an optimal distribution strategy.
If you’re a surviving spouse, you have a few options available to you. If you have immediate cash flow needs and want to begin taking distributions from the inherited IRA, you could simply choose to take a lump sum distribution. You also have the option of using what the IRS terms the ‘10-year rule,’ allowing you to take distributions in any amount at any time, as long as all the IRA assets are depleted by the end of the tenth year following the year of the original account owner’s death.
Keep in mind, though, that any distributions taken from an inherited traditional IRA will be taxed as ordinary income.
If you’d prefer to extend the tax-deferral benefits of an inherited IRA, you can choose to roll the assets over into your own IRA and begin taking distributions at age 72 based on your own life expectancy. Alternatively, you could transfer the assets into an inherited IRA and take distributions over the longer of your or your deceased spouse’s life expectancy.
- Rolling the assets into your own IRA may be advantageous if you haven’t yet reached age 72 but your spouse had—allowing you to stretch out the tax-deferral of the assets by delaying distributions until you turn 72.
- On the other hand, an inherited IRA might be preferable if you’re older than your deceased spouse (allowing you to delay distributions until they would have turned age 72), or if you’re younger than age 59 ½ and anticipate needing to take distributions immediately (inherited IRAs aren’t subject to the IRS 10% early withdrawal penalty).
The SECURE Act (enacted in 2019) drastically changed IRA rules for non-spousal beneficiaries. Under the new rules, you’re now required to directly roll over the inherited assets to an inherited IRA. You can withdraw those assets when and how you see fit, but all assets must be distributed from the account on or before December 31st on the 10th anniversary year of the original owner's death. There are a few exceptions to this requirement:
- Minor children beneficiaries
- Disabled or chronically ill beneficiaries
- Beneficiaries who are within 10 years of the original account holder’s age
These ‘eligible designated beneficiaries’ also have the option to take RMDs based on their own life expectancy.1
Any decisions related to the disposition of inherited IRA assets should involve an in-depth discussion with your tax advisor and your Truist advisor who can collaborate in helping you evaluate your cash flow and income needs, taxable and tax-deferred accounts, and determine the best strategy to employ.