8 Things to Know About an Inherited IRA from a Non-Spouse
Not All Inherited IRAs are Created Equal
If you’ve inherited an IRA, it’s important to know that not all inherited IRAs are the same. If you’ve inherited one from a non-spouse, you will need to be aware of a different set of rules. While not necessarily complicated, they differ enough from the standard IRA rules that it is worth it to understand what actions you can and cannot take. Below we’ll review eight things you should know as a non-spouse beneficiary of an inherited IRA.
1. There’s No Rush
The first thing to know after receiving a non-spouse inherited IRA is that nothing needs to be dealt with immediately. You have time to ensure that all your ducks are in a row regarding the account. Reach out to the current manager of the IRA and make sure they are aware of the death of the previous owner. You will also want to double-check the paperwork to ensure that it is correct and that you are, indeed, the beneficiary.
It may feel like a windfall at first but take your time before deciding if you want to take a distribution from the account. It’s a good idea to consider the IRA as an asset with its own possible earning potential. Once you take money out, you won’t be able to put it back in.
2. You May Set Up Your Own Beneficiary
Just as you received the IRA as a beneficiary, you can - and should – set up your own beneficiary, too. In fact, this step is one of the first you’ll want to take after receiving the IRA. If you happened to die before choosing your beneficiary, it will default to an often boilerplate resolution. Frequently, this results in the fund being rolled into your estate. Once in the estate, it can lead to additional taxes being applied to the fund and increase the amount of time and hassle it takes for your heirs to benefit from it.
3. You Can’t Make Contributions
By law, you are not permitted to make contributions to an inherited IRA from a non-spouse. Even if you have your own IRA, you won’t be able to transfer those funds into the inherited IRA.
4. You Can’t Convert the Account
Not only are you unable to contribute to an inherited non-spouse IRA, but you’re also not permitted to convert it to another type of account. It’s common to want to convert your IRA into a Roth IRA but, under the current rules, you cannot make that change.
5. You CAN Manage the Investments
One power that you wield as the inheritor or a non-spouse IRA is to change how the account is invested. You can choose to invest in different funds, and you also have the power to change the management of the account. To consolidate your holdings, for instance, you may want to transfer the new account to your established financial team. Something to keep in mind is that if you take a distribution from the IRA, you won’t be able to roll it over for at least sixty days.
6. You’re Subject to Required Minimum Distributions
These inherited funds are subject to the rules of Required Minimum Distributions, commonly called RMDs. There have been some recent changes to RMD rules, however, which are important to note. If you inherited your non-spouse IRA prior to 2020, the rules have not changed, meaning your distributions are spread over an estimated total life expectancy. If you inherited an IRA in 2020 and beyond, however, you’re now subject to the ten-year rule. In essence, you have ten years to draw down all the funds in the account.
SEE ALSO: The Stretch IRA is Gone: What Now?
7. You May Use a Qualified Charitable Distribution
If you are 70 ½ or older, you can make Qualified Charitable Distributions (QCD) annually. You will be able to make a tax-free transfer from your inherited IRA to accomplish this. Using the QCD is a useful strategy to decrease your tax burden, help the charities you support, and defray the RMD amount.
8. There’s Good News and Bad News on Distributions
Any distributions you take from your non-spouse inherited IRA will be subject to taxation. However, there is a benefit to be aware of — the non-spouse IRA does not incur the 10% fee for early distribution of funds.
Final Thoughts on Non-Spouse Inherited IRAs
Being the beneficiary of an IRA as a non-spouse is a wonderful gift to receive. Though the rules are a bit different from a traditional or Roth IRA, they are not overly complex. The eight items above should give you the information you need to utilize your gift to the fullest extent. Since every person’s financial situation is unique, however, you may also benefit from the services of a professional financial advisor.