Many IRA assets will ultimately go to non-spouse beneficiaries. Consequently, when these beneficiaries inherit the funds, special rules kick in. As a result, Inherited IRAs are not like your own personal IRA account. Therefore, to shed light on these intricacies, here are seven non-spouse beneficiary rules for inherited IRAs that may surprise you:
You cannot contribute to your inherited IRA.
You cannot make contributions to an inherited IRA. Therefore, if you do have your own IRA, you cannot add those funds to the Inherited IRA or vice versa.
You can move your inherited IRA.
If you are unhappy with the investment choices or the custodian, you can move your inherited IRA to another custodian, and you can select different investment options. However, you must move the account by direct transfer, and the new account must be an inherited IRA as well. As a non-spouse beneficiary, you cannot take a distribution and then roll it over within 60 days.
You may be able to do a QCD.
If you have a charitable inclination, you might consider utilizing a qualified charitable distribution (QCD). As a result, this enables you to transfer up to $100,000 of your IRA funds (annually) directly to the charity of your choice in a tax-free transfer. However, it’s important to note that to do a QCD, you must be 70 ½ or older.
You cannot convert your inherited IRA.
Many times, non-spouse beneficiaries express interest in obtaining a Roth IRA. Unfortunately, the rules do not allow non-spouse IRA beneficiaries to convert inherited IRAs to Roth IRAs.
You may be subject to annual RMDs, or the 10-year rule at a minimum.
You can’t keep the funds in your inherited IRA forever. If you inherited the IRA funds in 2020 or later, as a non-spouse beneficiary you will most likely be subject to a 10-year payout period, possibly with annual RMDs during the 10-year period. Certain eligible designated beneficiaries who inherit in 2020 or later and those beneficiaries who inherit prior to 2020 may still be able to stretch RMDs over life expectancy.
Your distributions may be taxable, but there will be no penalty.
Inherited IRAs are never subject to the 10% early distribution penalty. However, if you inherit a traditional IRA, it is likely that the distributions you take will be taxable. Instead, distributions from an inherited Roth IRA will most likely be tax-free. If you inherit a Roth IRA, you are more fortunate from a tax perspective.
You should name a successor beneficiary.
When you inherit an IRA, it makes sense to name a beneficiary. If you don’t, the default provisions in the IRA document are likely to apply. In many cases, this would mean the funds would go to your estate which can mean more taxes and the time and expense of probate.
By Sarah Brenner, JD
Director of Retirement Education
