Can an Inherited IRA Be Passed On?
Inheriting an Individual Retirement Account (IRA) can be a significant financial windfall for the beneficiaries. However, many individuals may wonder if this inherited IRA can be passed on to future generations. The answer to this question is both yes and no, depending on the type of IRA and the rules set forth by the IRS.
Type of IRA Matters
The first factor to consider is the type of IRA in question. There are two primary types of IRAs: traditional IRAs and Roth IRAs. The rules for passing on a traditional IRA differ from those for a Roth IRA.
Traditional IRA Inheritance
When a traditional IRA is inherited, the beneficiaries have several options. They can take the entire balance as a lump sum, receive the funds in a series of payments, or roll the inherited IRA into their own IRA. However, if the inherited IRA is not rolled over into a new IRA within 60 days, the entire balance is subject to income tax in the year of distribution.
If the inherited IRA is rolled over into a new IRA, the beneficiaries must follow the required minimum distribution (RMD) rules. These rules state that the beneficiaries must begin taking RMDs by the end of the year following the year in which the original IRA owner passed away. If the beneficiaries are not yet 72 years old, they can delay taking RMDs until the year they turn 72. However, once the inherited IRA is rolled over, it cannot be passed on to future generations.
Roth IRA Inheritance
In contrast, a Roth IRA has different rules regarding inheritance. If a Roth IRA is inherited, the beneficiaries can take the entire balance as a lump sum or receive the funds in a series of payments. Unlike traditional IRAs, there are no RMDs required for Roth IRAs. This means that the inherited Roth IRA can be passed on to future generations without any tax implications.
Summary
In summary, whether an inherited IRA can be passed on depends on the type of IRA and the rules set forth by the IRS. Traditional IRAs must be rolled over into a new IRA and follow RMD rules, making it difficult to pass on to future generations. On the other hand, inherited Roth IRAs can be passed on without any tax implications, allowing the financial benefits to continue for generations to come. It is essential for beneficiaries to understand these rules and consult with a financial advisor to make the best decisions for their inheritance.
