Inherited IRAs for Non-Spouses

Patrick Cote |

BY: KATE HENNESSY,  CFP®

In 2005, after my Dad passed away suddenly, my brother, the executor of his estate, took a year to gather information about my parents’ investment accounts, so that it was easy for my Mom to understand.  My Mom lived another 10 years and then she passed away suddenly in 2015.   Thankfully, the work that my brother did following my Dad’s death created less administrative work for my siblings and I after my Mom passed. 

Over the course of the next few months, I’ll write about actions to take after your second parent passes. These articles will be written from the perspective of a child that has received an inheritance as a result of losing two parents. For this month, I’ll cover Inherited Individual Retirement Accounts (IRAs) and how to treat Required Minimum Distributions (RMDs). The rules below apply to all non-spouse beneficiaries.

An IRA is an account that allows anyone to save for retirement with tax-free growth on a tax-deferred basis.  When a parent passes away and owns an IRA at his or her death, that IRA is then bequeathed to beneficiaries and it becomes an Inherited IRA for the beneficiary(ies). When an IRA is inherited from a parent, the beneficiary (child) cannot treat it as his or her own, because the original owner was the parent. While the IRA cannot receive any contributions and assets cannot be rolled into or out of the IRA, the inherited funds can continue to grow tax-deferred.

How and when you take required minimum distributions as a beneficiary depends on when you inherited the IRA.  Prior to the SECURE Act of December 2019, beneficiaries could “stretch” their RMDs over their single life expectancy.   

For example,

  • If the original IRA owner died before December 31, 2019 and was under age 70 ½, you could begin taking RMDs no later than December 31 of the year following death and “stretch” the distributions over the beneficiaries life expectancy.
  • If the original IRA owner died before December 31, 2019 and was 70 ½ or older, the beneficiary could elect to calculate the RMDs by using their own age or the original IRA owner’s age in their year of death, which ever was longer.

However, the Secure Act of 2019, changed the game on how non-spouse beneficiaries could treat distributions from Inherited IRAs.  If the original owner of the IRA died on or after January 1, 2020, non-spouse beneficiaries are required to withdraw all assets from an inherited IRA by December 31 of the 10th year following the IRA owner’s death.  The SECURE Act 10-year RMD rule applies to both traditional/rollover IRAs as well as Roth IRAs.

As someone who has received an IRA inheritance, I’ve thought quite a bit about what to do with the money. In most cases an inheritance was the source of someone’s hard earned money or gain from wise investments.  If you don’t have an immediate need for the money, leaving the assets in the Inherited IRA may be the wisest move over the long term, subject to the RMD rules. This is because the longer you leave money in an Inherited IRA, the longer you will enjoy potential tax-deferred growth. When you take money out of an IRA it is taxed as ordinary income and minimizing the total taxes paid over the 10 years may be one of your primary goals. Regardless of when you take your distribution, be wise on how you use the money. My brother once told me to spend a portion of my inheritance on something that brings me joy and to invest the remainder.

If you are a beneficiary of an IRA, it’s important to consult with a financial advisor and tax professional before you begin taking distributions.  Contact us directly and we are happy to answer any questions you may have regarding Inherited IRAs or any other financial planning matters.