Making Sense of Inherited IRAs

Written By George Damasco, Investment Advisor at MPM Wealth Advisors

When dealing with the loss of a loved one, you’re often times tasked with managing their assets.  One common asset is their Individual Retirement Account (IRA).  An Inherited IRA is left to a beneficiary following the owner’s death.  It’s important to take the time to understand the ins and outs of this inheritance, which we’ve boiled down to four core considerations.

1. The Type of IRA

Let’s start by first reviewing the differences between the two commonly inherited IRAs – Traditional and Roth. See the IRA comparison chart below.


2. The Relationship to the Deceased

How the inheritance is managed is determined by the type of beneficiary – spouse or non-spouse.

A spouse has two options:

  1. A spousal rollover takes the amount of the inheritance and rolls it over into the spouse’s own IRA. This is treated as the spouse’s own IRA with all of their normal rules regarding withdrawal ages, RMDs etc. applied.  So, for example, if the spouse is younger than 59 ½, any distributions prior to then will be subject to the 10% penalty.
  2. If, however, the spouse elects to own the IRA as the beneficiary, there is no 10% penalty for withdrawals prior to age 59 ½, but RMDs must begin when the deceased would have had to take them. The RMDs will be calculated based on the beneficiary’s age, not that of the deceased. Lastly, if the IRA is a Roth, and the account hasn’t been open for at least five years, any withdrawal of earnings will be subject to income tax but not the 10% penalty.

When a non-spouse inherits an IRA, it works much like a spouse continuing the IRA as beneficiary with these exceptions:

  • A non-spouse may not roll over the inherited IRA into their own account;
  • The 10% penalty does not apply to any distributions;
  • If it is a Roth IRA that hasn’t been open for five years, distributions are subject to ordinary income tax;
  • RMDs must commence the year after the death of the account owner;
  • The beneficiary may elect to distribute the entire amount over a five-year period without any designated frequency (i.e. you can take a portion the first year, nothing the next three years and the balance in the fifth year).

Rules for IRAs inherited by trusts and estates are complex and beyond the scope of this article.

3. Has the Original Account Holder Commenced RMDs?

If the original account holder had commenced RMDs, than the beneficiary must suffice the RMD for the calendar year in which the IRA was inherited. In subsequent years, a spousal beneficiary may continue using the life expectancy of the deceased to increase distributions or roll it into their own IRA to reduce the required amount based on their younger age.

4. Be Mindful of Deadlines

The IRS imposes deadlines for setting up Inherited and Spousal Rollover IRAs.  All deadlines occur in the year following the death of the account holder.