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Marcus Explains: What Is an Inherited IRA?

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What we’ll cover:

  • An Inherited IRA is an account you can open when you inherit an IRA or an employee-sponsored retirement plan
  • Inherited IRAs can only hold the funds you’ve inherited; you cannot make new contributions to the account
  • You can open an Inherited IRA through an IRA custodian (e.g., banks and brokerage firms)

You probably already have a basic idea of what an IRA is and how these individual retirement accounts work. But not many people have heard of an “Inherited IRA.” Curious? Read on.

An Inherited IRA is a type of account you can open when you inherit an IRA or an employee-sponsored retirement plan (e.g., 401(k) plan). It is specifically for receiving and holding any funds you transfer from a retirement account that you’ve inherited. 

Inherited IRAs are also sometimes called “Beneficiary IRAs” or “beneficiary distribution accounts.” They’re usually a common option for individuals who have inherited a retirement account from someone other than their spouse.  

Ok, got it. What are some key things I need to know?

Unlike a Traditional or Roth IRA, you can’t make any new contributions (translation: you cannot add personal funds) to an Inherited IRA. This type of account can only hold the funds you’ve inherited. 

But they do provide a few benefits. 

For example, if you’ve inherited a retirement account from a family member (who’s not your spouse), transferring the inherited funds into an Inherited IRA allows the money to continue to grow tax-deferred. And it gives you the option of spreading your distributions over a certain number of years – instead of taking a lump-sum distribution immediately.

Where can I open an Inherited IRA?

You can open an Inherited IRA through an IRA custodian, which is simply a financial institution that’s an IRA provider and is able to hold the inherited funds, maintaining the account for you. 

Banks and brokerage firms are just some examples of institutions that can serve as IRA custodians. By law, IRA custodians are required to follow all regulations governing these retirement accounts. It’s a good idea to go over the rules and other account details (e.g., fees) with your custodian and ask any questions you may have regarding your specific situation. 

Wait…what kind of rules are we talking about?

The IRS has certain rules when it comes to distributing funds from your Inherited IRA – for instance, when funds must be distributed from the account. The distribution requirements depend, in part, on your relationship to the person who named you as beneficiary of their retirement account. Spouses and non-spouses (i.e. friend or family member) have different distribution rules they must follow. 

Figuring out your distribution obligations can get head-spinningly complicated, especially in light of a new law (the SECURE Act) that Congress passed in December 2019, bringing major changes to the rules governing inherited accounts starting in 2020. 

So don’t be shy about asking for help from a financial advisor to understand how these rules may apply to you and the tax implications of your distribution options.

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This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

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