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What to Do if I Inherit an IRA Account

If you are named a beneficiary, it’s possible that you can inherit an IRA account. Keep reading to find out what to do in this situation.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

After the passing of a loved one, it is possible that they will make you the beneficiary of some of their assets described within their Will. It will be the written directives left by the deceased that will determine who will become the new owners of assets upon their death. One of the possible assets you may inherit is an IRA account.

What is an IRA Account?

An IRA account is an individual retirement account. It is an opportunity for individuals to invest and save for their eventual retirement, ensuring they will have sufficient money to live on when the time comes. IRA accounts also have an age at which you are allowed to access the money you have saved and invested, which is when you are 59 ½. If you access the money before this date, you will have to pay a 10% penalty on the amount of money you take out. However, you can leave the money in your account until you reach 70 ½, at which point you have to start taking money out, known as your required minimum distribution (RMD).

Rules to Follow When Inheriting an IRA Account

Trust & Will, a leader in online Estate Planning services, knows how confusing the rules regarding inherited IRA accounts can get with so many different restrictions. That is why we have put together a list of rules you will want to follow when inheriting an IRA account. We will break down the rules based on what your relationship is to the person who passed, along with the rules regarding the age of the deceased. All information is pulled from the official IRS page on IRA accounts.

Spouse of the deceased 

As the spouse, you will have the most options available to you when inheriting an IRA account. If you are labeled the sole beneficiary, you are allowed to treat the IRA account as your own upon the passing of your spouse. Thus, you can have both your original IRA and the IRA account of your spouse in your name. You can also add money to your spouse’s account, as you have taken ownership of it. However, if you would like to simplify the number of accounts in your care, you can also roll over all money within your spouse’s IRA account over to your original account, keeping all finances within one space.

As the spouse, you also have the option to go by the age of your spouse for pulling out money, or you can choose to go by your age as the new owner of the account. You get to decide which decision will be best for you.

If your spouse dies before the age requirement and you choose to go by their age

When you go by their age, you have the option to have the money taken out over the course of the next five years. You get to decide how much you take out and when, but all money must be removed after five years following their death. You can also choose to cash out the entire account at once, in which you will be subject to income taxes on the entire amount. 

If your spouse dies after the age requirement and you choose to go by their age

With this choice, as a spouse you can pull out the money throughout the time period that would have been the life expectancy of your deceased spouse. With this option you will be subject to fulfilling the RMD amount your spouse would have had to take out during their life as well.

Those under the SECURE Act

If the original owner dies before the age requirement OR after it

Individuals who are regarded under the new SECURE Act as special cases have the option to take out the money within the IRA account throughout what would be considered the life expectancy of the deceased. This includes disabled individuals, minor children, chronically ill people, anyone not over 10 years younger than the deceased, and spouses. The only exception is that minor children must empty the account within 10 years after they have turned 18.

Everyone else

If the original owner dies before the age requirement OR after it

Everyone else who inherits an IRA account and is not a special case, has had two options since the creation of the SECURE Act, regardless of when the person dies. They can either choose a 5-year plan or a 10-year plan. With the 5-year plan, you are given a total of 5 years to empty the account, and you can choose how much to take out and when. You could cash it all out immediately or spread it out throughout the 5 years. The 10-year plan is essentially the same as the 5-year plan, except you are given 10 years instead of 5 years to empty the account. 

Importance of Estate Planning with IRA Accounts

The importance of designating a beneficiary for your IRA account within your Estate Planning has to do with the options available to those who are beneficiaries compared to those who are not. When you designate a beneficiary to inherit the account, the options discussed above are all available to the individual. However, if no beneficiary is listed to inherit the IRA account, it will have to go through probate court to decide how the account money will be distributed among your family. If through probate court it is decided that only one person should inherit the account, then their only remaining option is to take the 5-year plan, regardless of their relationship to you. Therefore, even if you are a spouse or an individual that falls within the SECURE Act, these options will no longer be available to you.

Estate Planning will be crucial for helping maximize your families’ options for your inherited IRA account. At Trust & Will, we know how complicated Estate Planning can sometimes seem. We are here to help simplify Estate Planning to ensure your IRA account has a beneficiary, and that all of your assets get distributed according to your wishes. With our online Estate Planning services, you can create a Will, Trust-Based Estate Plan, and more.