May 9, 2023
An Inherited IRA is a type of account you can open when you inherit an IRA or an employer-sponsored retirement plan (e.g., 401(k) plan) as a named beneficiary.
Opening an Inherited IRA is a common option for non-spouse beneficiaries who do not want to take a lump-sum distribution from the retirement plan they’ve inherited from the original account owner.
Unlike a Traditional or Roth IRA, you can’t make any new contributions to an Inherited IRA. This type of account can only hold your inherited funds.
Still, an Inherited IRA could offer potential tax benefits.
For example, if you’ve inherited a retirement account, instead of taking a lump-sum distribution, you could transfer the funds into an Inherited IRA, allowing the money to remain tax-deferred. You may also have the option to spread out your distributions over a certain period of time. For more information, visit the IRS website: "Retirement Topics – Beneficiary."
Good to know: Inherited IRAs are also sometimes called "Beneficiary IRAs."
The IRS has rules when it comes to distributing funds from an Inherited IRA.
The distribution requirements depend, in part, on your relationship to the person who named you as beneficiary of their retirement account (i.e., the original account owner). Spouses and non-spouse beneficiaries have different distribution rules they must follow.
The age of the original account owner when they passed away, as well as the year of their death, could also impact your distribution options. Visit the IRS for more details.
Good to know: RMD rules can be complicated, so don't hesitate to consult a financial or tax advisor to understand your obligations.
You can open an Inherited IRA through an IRA custodian, a financial institution that is able to hold the inherited funds and maintain the account for you.
Banks and brokerage firms are examples of institutions that can serve as IRA custodians. By law, IRA custodians are required to follow all regulations governing these retirement accounts.
Before opening an account, it’s a good idea to do some comparison shopping – pay attention to details such as account opening minimums, fees and investment options.
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