Can an Inherited IRA Be Inherited?
Understanding the intricacies of inherited IRAs is crucial for anyone who has inherited one or is considering inheriting one. The question “can an inherited IRA be inherited?” is a common one, and the answer is both yes and no, depending on the circumstances. In this article, we will delve into the details of inherited IRAs, their tax implications, and the options available to beneficiaries.
An inherited IRA, also known as a beneficiary IRA, is an individual retirement account (IRA) that is passed on to someone after the original account holder’s death. When an IRA is inherited, the account can either be transferred directly to the beneficiary or distributed over a specific period, as determined by the IRS rules. The key factor in determining whether an inherited IRA can be inherited is the relationship between the deceased account holder and the beneficiary.
There are two types of inherited IRAs: a Traditional IRA and a Roth IRA. The rules for inheriting each type differ slightly. For a Traditional IRA, the inherited account can be transferred to the beneficiary as a “beneficiary IRA,” which allows the funds to continue growing tax-deferred. Alternatively, the beneficiary can take a lump-sum distribution, subject to income taxes. In contrast, a Roth IRA is tax-free, and the inherited funds can be withdrawn tax-free, provided the account was open for at least five years before the original account holder’s death.
When it comes to the question of whether an inherited IRA can be inherited, the answer is yes, but with certain conditions. Beneficiaries have several options for handling an inherited IRA:
1.
Take Required Minimum Distributions (RMDs): Beneficiaries must take RMDs each year from the inherited IRA, based on their life expectancy. This ensures that the IRS collects taxes on the inherited funds over time.
2.
Transfer the IRA to a new account: Beneficiaries can roll over the inherited IRA into a new IRA in their own name, which allows them to continue managing the account and potentially avoid some taxes.
3.
Transfer the IRA to a non-spousal beneficiary: If the original account holder designated a non-spousal beneficiary, the funds can be transferred to that person’s IRA, allowing them to manage the account as their own.
4.
Withdraw the entire balance: Beneficiaries can choose to withdraw the entire balance of the inherited IRA, but this will result in a larger tax bill and the loss of potential tax-deferred growth.
In conclusion, the answer to the question “can an inherited IRA be inherited?” is yes, but with various options and considerations. Beneficiaries must carefully evaluate their options and consult with a financial advisor or tax professional to make the best decision for their financial future.
