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Inherited IRAs: How they work and what to do with them

There’s a lot to consider when you lose a loved one, especially if they leave behind an inheritance. If you’re inheriting an IRA or a workplace savings account, like a 401(k), there are some rules and timeframes you’ll need to be aware of.  
It’s also important to keep in mind that if you plan to disclaim all or part of your inheritance in an IRA, you’ll have to do that within 9 months of the death and before you take possession of the money. The timeframe for disclaiming a workplace plan could also be shorter, depending on the plan rules. 

Understanding required minimum distribution (RMD) rules

Workplace plans and traditional IRAs usually have a RMD that the account owner must take each year before year end, if you’re 73 or older. Timing may be different for inheritors, but you could owe a 25% penalty to the IRS if the RMD is not taken.1 
If you inherit an IRA, your RMD rules aren’t based on your required beginning date. Some factors you’ll need to know to determine your distribution rules are: 
  • Your age 
  • The original account owner’s date of birth 
  • If you inherited the account timely or untimely 
  • Your relationship to the account owner 
  • If the account owner was in pay or not in pay 
These can all affect how long you’ll have to empty your account and how much your annual distributions need to be. 
Like withdrawals from a traditional IRA, RMD withdrawals from inherited IRAs are taxed as income. Inherited Roth IRA distributions are generally tax free if the assets have been in the owner’s account for 5 years or more.2 
Taking care of your loved one’s final RMD in an inherited IRA 
 If your loved one had reached RMD age before they passed away, you’ll need to make sure their final RMD was taken before you take a distribution for yourself. If it wasn’t, you’ll have until December 31 of the year they passed away to take it. If there’s more than one beneficiary on the account, you should work together to ensure you take the full amount.  
If your loved one’s IRA was at Fidelity, you'll need to open a beneficiary distribution account (BDA) to take the withdrawal. If their account was not at Fidelity, find a statement and contact the financial institution to determine your next steps. 

Inheriting an IRA from someone who isn’t your spouse (for example, a parent)

If you’ve been named as a beneficiary on a retirement account from someone other than your spouse, your rules will depend mostly on when you inherited the account. SECURE Act 2.0 changed the rules for most nonspouse beneficiaries and put a shorter time limit on emptying the account for people who inherited after December 31, 2019. 
Special rules for eligible designated beneficiaries of inherited IRAs 
SECURE Act 2.0 allows for exceptions to the shorter distribution time limit if you’re an eligible designated beneficiary (EDB). 
You can be an EDB if one of these is true for you: 
  • You’re the spouse of the original account owner. 
  • You’re not more than 10 years younger than the original account owner. 
  • You’re chronically ill or disabled according to the IRS definition. 
  • You’re a minor child of the original account owner. 
See how this may affect your specific inheritance situation 

Inheriting an IRA from your spouse

As a spouse, you’ll have the choice of moving the inherited balance into an inherited account or combining it with your own accounts. Deciding what’s best for you will depend on your age, expected retirement date, tax considerations, immediate need for cash, and any need for creditor protection.  
It’s easy to get overwhelmed with all of the choices, especially during such a difficult time, but it’s important not to rush to a decision that might not benefit you in the end. Review Withdrawing from an inherited IRA for additional considerations and help with your decision.  
Note, if you’re younger than 59½ there may be penalties. Consider working with a qualified tax professional to help make sure you’re taking full advantage of your inherited assets. 

Inheriting an IRA from an entity (for example, a trust or estate)

Trusts and estates have special rules that can complicate inheriting an IRA. The trust or estate will need directions from the executor or trustee to make sure your loved one’s final wishes are followed, and you’ll have to follow the rules established by the trust or estate for your distributions. 
If you inherit from a trust, you’ll want to ask the trustee in charge or work with your trust attorney to understand what kind of trust you’re inheriting from. Once you know the rules of a trust, you’ll want to work with a tax professional to decide how to take your distributions. Review Withdrawing from an inherited IRA for additional considerations. 

Inheriting an inherited account

If you inherit an account that was already inherited, your options depend on the original account owner and their original beneficiary, who you inherited from. You’ll need to know when both account owners passed away and possibly what distribution rules your loved one was using for their inherited IRA.  
In this situation, it’s a good idea to consult an attorney or tax professional. 

Inheriting a Roth IRA or workplace retirement plan

You’ll need to keep traditional and Roth IRA accounts separated, since they’ll have different tax treatments and distribution rules. 
If your loved one met their 5-year aging requirement for their Roth IRA, meaning it had been at least 5 years since they made their first contribution, then you’ll be able to take tax-free withdrawals from the account. Depending on when you inherited the account, you might have an RMD or a limited amount of time to empty the account, but you usually won’t owe taxes on the distributions. 
For workplace retirement plans, you’ll need to work with your loved one’s employer or the recordkeeper who managed their retirement plan to know what kind of contributions they made. This will be important for finding out what kind of inherited IRA the money can be moved into. Some employer plans might let you keep the inheritance in an inherited workplace retirement plan for a set amount of time. 
Inherited workplace savings plans also allow beneficiaries the same net unrealized appreciation (NUA) benefits as the original account owner, which might help reduce what you owe in taxes. NUA doesn’t apply to IRAs, so it’s a good idea to work with a tax advisor before moving the workplace plan into an inherited IRA. 

What happens with other types of inherited accounts?

Inheriting retirement accounts can be complex, but nonretirement accounts, like individual or cash management accounts, are usually pretty straightforward. In most cases, you can just move the inheritance to an account in your name and start making investment decisions or withdrawals.  
If you had a joint account with your loved one, with the right paperwork you can often remove or add account owners without changing the account. You won’t have the hassle of moving it into any kind of inherited account, and you’ll most likely be able to cash out once the money has been transferred to you.  
These accounts can be easier to access quickly but be aware of tax implications if you’re working with investments in the account. Consider consulting a tax professional to talk through your specific scenario. 

Glossary of common terms for inherited IRAs

Legal and financial vocabulary can be difficult to understand when it's new to you. Here's a brief glossary of common terms you may encounter in the process of inheriting an IRA. 
  • Beneficiary: The beneficiary is the person who will receive the money when an account holder passes away. A beneficiary may be a spouse, another person (nonspouse beneficiary), or a trust or entity. Different types of beneficiaries have different options for handling the money. 
  • Eligible designated beneficiary (EDB): EDBs are a type of beneficiary that can only apply in situations where the original depositor passed away on or after January 1, 2020. They are the spouse, the minor child of the original depositor, a disabled or chronically ill person, or an individual that is not more than 10 years younger than the original depositor. 
  • Entity: A beneficiary who is not a person, such as an estate, a charity, or a non-look-through or non-see-through trust. 
  • Traditional IRA: An IRA (individual retirement arrangement) is a type of retirement savings account with tax advantages. In a traditional IRA, contributions may be tax-deductible.  
  • Roth IRA: A Roth IRA is a kind of retirement savings account with tax advantages. Because contributions are made with after-tax dollars, future withdrawals will be tax-free, as long as the account is at least 5 years old. With a Roth IRA, you can withdraw contributions without penalty at any time, for any reason. 
  • Inherited IRA: An inherited IRA, sometimes called a beneficiary IRA, has a unique purpose. Inheritors of retirement accounts move their inheritance into an inherited IRA to maintain tax status and ensure withdrawal rules are followed. 
  • RMD: A required minimum distribution (RMD) is a mandatory withdrawal from tax-deferred retirement accounts that starts when the account owner reaches the age of 73. Timing may differ for inheritors.  
  • Required beginning date: The date by which an individual must take their first RMD from their traditional IRA. This is April 1st of the year after the individual reaches RMD age. 
  • Inherited timely: The timing of moving inherited assets into your inherited account can play a role in determining your distribution rules. For an inheritance to be timely, it needs to be moved into your name by December 31 of the year after the original account owner passed away. 
  • Inherited untimely: If the inheritance is not moved into your inherited account by December 31 the year after the original account owner passed away, then it was inherited untimely. 
  • Rollover: A rollover is a transfer of assets from one retirement account to another without having to pay taxes.  
  • Disclaim: To disclaim means that you give up your right to receive an inheritance. If you choose to do so, whatever assets you were meant to receive are passed along to the next designated beneficiary. 

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1. Rules in this section are for beneficiaries that have inherited directly from an original account owner. If you've inherited from another beneficiary, we recommend that you speak with a tax advisor in order to identify the withdrawal schedule that's right for your situation. 2. For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

This information is general in nature and provided for educational purposes only.

A distribution from a Traditional IRA is penalty-free provided certain conditions or circumstances are applicable: age 59 1/2; qualified first-time homebuyer (up to $10,000); birth or adoption expense (up to $5,000 per child); emergency expense (up to $1000 per calendar year); qualified higher education expenses; death, terminal illness or disablility; health insurance premiums (if you are unemployed); some unreimbursed medical expenses; domestic abuse (up to $10,000); substantially equal period payments; Qualfied Federally Declared Disaster Distributions or tax levy.

Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.