Can an Inherited IRA Be Converted?
When an individual passes, their beneficiary inheriting their IRA has various options available to them depending on its type and age of its original owner. Each account type and age category requires different compliance with specific rules that must be fulfilled to successfully inherit it.
An inherited IRA can be a complex investment and should be overseen by a knowledgeable expert to ensure all tax laws are followed.
When inheriting an IRA, you have the option of treating it as your own by rolling it over into an account in your name and accessing funds immediately while avoiding early withdrawal penalties (if under age 59 1/2).
However, doing this restricts future contributions or transfers between retirement accounts into it, and limits to one rollover per 12-month period between different IRAs.
Another solution may be withdrawing money from an inherited IRA and placing it directly in your other accounts, though this would increase taxable income and forgo any potential tax-deferred growth within it.
Death can be heartbreaking, and dealing with its financial repercussions even more so. One major consideration involves inheriting an Individual Retirement Account which often raises numerous questions.
Non-spouse beneficiaries typically must deplete any inherited accounts within 10 years after the death of the original owner, though they can choose to take distributions over their life expectancies instead.
An inherited account, also known as a beneficiary IRA, can be opened by any individual who inherits assets of an IRA from either their deceased relative’s estate or trust and will inherit those assets of their inherited IRA from somebody else, such as trust or estate administration. Such accounts include traditional, Roth and rollover IRAs as well as SEP IRAs and SIMPLE IRAs – they could even form part of employer sponsored plans such as 401(k), 403(b) annuity plans or 457 deferred compensation plans sponsored by state and local government organizations as deferred compensation plans.
If you inherit an IRA from someone else, the IRS treats it as though you had always owned it yourself and adjusts your required minimum distribution schedule accordingly.
If you inherit an IRA from your spouse, it is possible to treat it like your own by rolling the funds into a separate account under your name and treating it like you own. This way, contributions can continue and required minimum distributions can be adjusted according to your own life expectancy schedule. Unfortunately, in February 2022 the IRS modified their rules in order to eliminate this strategy for non-spouse beneficiaries of these inherited accounts.
As with other assets, inheritance assets may also be transferred directly from one trustee account to the next or between custodians; but be mindful of any tax implications, as distributions from a traditional IRA are subject to ordinary income taxes and may incur an early withdrawal penalty of 10% if taken before age 59 1/2.
Assuming ownership of retirement account assets presents complex questions, so it may be wise to consult a financial or estate planner for advice. Your inheritance options depend on your relationship to the original owner as well as their age; also, 2019 SECURE Act changed many long-held rules regarding withdrawals from inherited IRAs.
Non-spouse beneficiaries of traditional, SEP and SIMPLE IRAs have options that enable them to extend the required minimum distributions, but must still pay taxes when withdrawing assets inherited through inheritance – an amount which could prove substantial unless sufficient funds have been set aside in advance for tax liabilities, according to Kane.
Beneficiaries’ options depend on their relationship to and time of inheriting an account from its deceased owner, as well as what type of IRA it is. Spouse beneficiaries typically have nearly unrestricted options available to them when inheriting an inherited IRA – such as treating it like their own and converting to Roth. Meanwhile, non-spouse beneficiaries typically have more limited choices available to them until 2020 under CARES Act may expand upon them.
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