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Inheriting an IRA? Spending vs. Investing

If you’ve inherited an IRA from someone other than your spouse, you can benefit from keeping the assets in a tax-deferred account.

By naming you as a beneficiary of an IRA, the original account owner has given you the opportunity to enhance your own financial security, should you choose to take advantage.

Note that inheriting an IRA from a spouse has a different set of rules; for information about inheriting an IRA from a spouse, see If you are the surviving spouse of an IRA owner in Fidelity Viewpoints®.

With an Inherited IRA, you can stretch your IRA assets by taking advantage of tax-deferred growth and annual minimum required distributions (MRDs). If you withdraw all the money, you’ll lose the retirement savings advantages and face a large tax bill. You can always take out more than the MRD amount if you need to; however, it’s usually advisable to leave the assets you don’t immediately need in the Inherited IRA, to take advantage of as much tax-deferred growth as possible.

MRDs on an Inherited IRA require careful attention, as they often must begin by the year after the year of the original owner’s death. If you miss taking MRDs, you may be subject to an IRS penalty. For more details, see Minimum Required Distribution (MRD) Rules for Inherited IRAs.

Even if you have short-term financial obligations, you may want to avoid taking all of your IRA inheritance in cash, for two reasons:

  • Short-term tax drain—If you cash out an IRA inheritance, you'll lose a significant portion of those assets to income taxes. Any withdrawals from non-Roth Inherited IRAs will likely be taxable as income in the year they're taken.
  • Long-term loss of earnings potential—The more money you withdraw from an Inherited IRA now, the less you have to build on for the future. Given that these assets have the potential to grow tax-deferred as long as they remain in the account, the cost of this lost opportunity can be quite substantial, as illustrated in the above chart.

Stretch your Inherited IRA assets

Although you must withdraw at least a minimum amount from your Inherited IRA assets each year, MRDs are generally based on your age rather than the age of the original IRA owner.

If you are younger than the original IRA owner, basing MRDs on your own age may minimize the taxable amount that must be withdrawn each year.

Next steps

Learn more about inheriting an IRA.
Depending on your relationship to the deceased, you may have several options.

Choosing investments for your IRA
Get help choosing from Fidelity’s wide range of investments.

Questions?

Speak with an Inheritor Services specialist.

The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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