Self-Directed Inherited/Beneficiary IRA

What are the inherited IRA distribution rules? Can I roll over a beneficiary IRA for a Rocket Dollar account?

Yes. You can rollover and use your inherited IRA if you are careful to manage the required minimum distributions (RMDs) with your investment. Spouses have options to consider.

SECURE Act Update

The Secure Act has passed Congress in 2019 and will put some changes into Inherited and Strech IRAs. Implementation will start to affect IRAs inherited after 2020. You can check out our blog on the topic, and stay tuned for further updates. 

I am considering or I have just received an Inherited IRA. How exactly do they work?

Inherited IRAs are received when a loved one passes away. You open a traditional IRA, but it must be reported differently. If you inherited the IRA before 2020, it generally must be distributed under the same timeline as the person who originally started them, through yearly required minimum distributions (RMDs). If you do not use the life expectancy method, you must explore other options described below.

Remember that distributions can happen after 59 and 1/2 and RMDs start at 70 and 1/2. That applies to the previous owner’s age. RMDs for inherited IRAs should be taken by December 31 of that year.

You can read more about RMDs and calculating them here.

In you are a recently widowed spouse considering opening an Inherited IRA.

If your spouse passed away, you might qualify for a spousal transfer and not need an inherited IRA. To qualify for a spousal transfer...

Spousal transfer (treat as your own)

  • You treat the assets as our own, once they arrive in a non-taxable event rollover to an IRA. Pre-tax traditional dollars must go to a traditional IRA, and Roth IRAs to Roth IRAs.
  • Only available as an option if you are the sole beneficiary
  • Under 59 1/2 early withdrawal extra 10% tax penalty still applies
  • You may designate your own beneficiary to the new/current IRA that you have.

I have an inherited IRA I received from someone who passed away after 2020. How are the new calculations?

They will be distributed over 10 years after you inherit them. This is, unfortunately, can be a much faster timeline for distributions.

  • You can withdraw from your inherited IRA assets at any time, in any amount within the 10-year time-frame.
  • You must withdraw all assets by December 31 of the 10th anniversary year of the IRA owner's death.

As long as the account is depleted within this time-frame, the RMD penalties can generally be avoided.

What are my options if I don't want to slowly distribute the IRA for RMDs using the life expectancy method?

  1. Spousal Transfer. If you are the spouse and sole beneficiary, you can open a new account to treat the IRA as your own. You will pay a penalty for early distribution before 59 and 1/2 like you would with any other of your own IRAs. If you are 10 years younger than your spouse, you will have to use a different calculation table for an inherited IRA spousal transfer.
  2. Lump-Sum Distribution. You can distribute the entire IRA at one time, and pay taxes on it. There are no early withdrawal penalties. You can start a new IRA or 401(k) with Rocket Dollar afterward if you wish, but remember you will be building up contributions from scratch at a $0 balance.
  3. 5-year method. You can open an IRA, and have the assets distributed over 5 years to lighten the tax burden. On the 5th year, all assets should be distributed. The 5-year method cannot be used if the original IRA owner is over 70 and 1/2.

How can I manage an investment if I'm required to distribute money in RMDs each year?

You must make sure that no RMDs are going to interfere with your investment you plan to make. If you have to distribute more than your investment is worth, you could be forced to sell assets prematurely.

 

See Our IRA Plan