How do you handle an inherited IRA?


Quick Answer

It is usually best to retitle an inherited IRA in the name of the beneficiary and keep the funds growing, which maximizes the tax advantages. Spouses have the option of rolling over the funds into their own IRAs tax-free, but non-spouse heirs’ only alternative is to withdraw funds (subject to taxation), AARP explains.

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Full Answer

A spouse can either retitle the IRA and keep it or roll over the money into an IRA in their own name. This rollover is tax-free, AARP says. If the spouse prefers to avoid the 10 percent penalty imposed on IRA withdrawals before age 59.5, he or she should retitle the IRA according to IRS regulations, identifying it as a beneficiary account. The spouse can then withdraw money penalty-free. For a traditional IRA, mandatory distributions start when the deceased would have reached the mandatory distribution age of 70.5, but if the IRA is retitled again so that it is in the beneficiary’s name alone, mandatory distributions start when the beneficiary reaches age 70.5.

A non-spouse cannot roll over the funds into their own IRA, and if they have inherited a traditional IRA, he or she cannot withdraw them without triggering a tax event. If the inherited IRA is split among several heirs, each heir should retitle their share. Any amount that is not withdrawn accumulates tax-free, and a beneficiary can pass the IRA to their own heirs, AARP states.

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