An Inherited IRA, also known as a Beneficiary IRA, is a type of Individual Retirement Account that is acquired by the non-spouse beneficiary of a deceased IRA owner. It allows the beneficiary to receive the assets of a deceased individual’s IRA under a slightly different set of rules compared to the original IRA owner.
Upon the death of an IRA owner, the account’s assets are passed onto the designated beneficiaries. If the beneficiary is not the spouse of the deceased, they can transfer the assets into an Inherited IRA.
With an Inherited IRA, the beneficiary must begin taking Required Minimum Distributions (RMDs), regardless of their age. The amount of the RMD is determined by the beneficiary’s life expectancy and the account balance.
There are specific rules for how and when these distributions must occur. For example, beneficiaries used to have the option to “stretch” distributions over their lifetime, but with the passing of the SECURE Act in December 2019, most non-spouse beneficiaries are now required to deplete the inherited IRA within 10 years of the original owner’s death.
This 10-year rule doesn’t apply to all beneficiaries though. Exceptions include disabled individuals, individuals who are not more than ten years younger than the decedent, and minor children of the decedent (though once they reach the age of majority, the 10-year rule kicks in).
It’s important to note that the rules for Inherited IRAs are complex and may have significant tax implications, so beneficiaries should seek professional advice to make sure they are in compliance with all regulations and to understand their options.