Flexibility is a great benefit of inherited IRAs. Beneficiaries who inherit this type of account may withdraw funds based on their needs, as long as they are in alignment with certain guidelines. They may begin withdrawing immediately or wait until the account matures, all while allowing assets to grow tax-deferred.
An inherited IRA is an Individual Retirement Account for the beneficiary of a deceased owner of an IRA or other types of retirement plans. It allows the beneficiary to withdraw assets based on IRS-approved distribution methods without having to pay an early withdrawal penalty.
While beneficiaries are taking distributions, the account has the potential to continue to grow tax-deferred until all assets have been distributed. Generally, the amount and timing of required distributions are based on the beneficiary's age or the original owner’s age, whichever is longer.
Did you inherit an IRA?
If you are the beneficiary of an IRA or qualified retirement plan, depending on its amount and other immediate financial needs, you may want to transfer the deceased individual’s retirement assets into an inherited IRA. A Janus Henderson Retirement Specialist can help you understand your options. Call us from 9 a.m. to 6 p.m. EST on weekdays at 800.525.1093.
Tax features
What are the tax features?
Qualified distributions from an inherited Roth IRA are not taxed. However, distributions from other types of inherited IRAs are generally taxed at your ordinary income tax rate. Any Required Minimum Distribution (RMD) amounts that are not satisfied for the year may be subject to an excess accumulation penalty of 25% (or 10% if corrected in a timely manner). So make sure to take your RMD!
Once a non-spouse takes a withdrawal due to death, the amount is not eligible for rollover into another IRA. The spouse beneficiary is an exception to this rule and can rollover assets into their own IRA. However, the spouse beneficiary must also take the RMD if required and that amount cannot be rolled over.
Investments
How much can I contribute to the plan?
Beneficiaries typically cannot contribute to an inherited IRA account. If a spouse decides to treat it as their own account by transferring the assets into their own IRA, then they can contribute as long as they meet the standard IRA eligibility requirements.
Generally, the best method for moving inherited IRA assets to another inherited IRA is by transfer of assets. Ask a Janus Henderson Representative for assistance or download the Transfer of Assets Form if you would like to transfer assets to Janus Henderson.
What is the investment minimum?
The investment minimum for an inherited IRA is $1,000 per fund.
Are there any important deadlines to be aware of?
Any Required Minimum Distribution (RMD) amounts for the year of death will need to be distributed by the beneficiary. Generally, the beneficiary may have to take annual distributions based on their age.
Forgetting to take the RMD
RMDs have to be satisfied before the end of each year. Any excess accumulations resulting from a missed RMD before the end of the year could result in a 25% (or 10% if corrected in a timely manner) penalty. However, if the beneficiary does not take RMDs in the initial years after the owner’s death, they still may be able to avoid the penalty by liquidating the inherited IRA account by the fifth anniversary of the original owner’s death. Keep in mind however, that this could generate a significant tax event depending on the amount of assets in the account. Also, liquidating will also cause you to lose any potential tax-deferred growth in the years ahead.
Help Calculating the RMD
Janus Henderson has the ability to calculate RMDs and assist the beneficiary with establishing systematic withdrawals to help you meet the required IRS rules. Contact a Janus Henderson Retirement Specialist to assist you with understanding the beneficiary distribution options.
Fees
What are the fees for an Inherited IRA?
There is no cost to open an account and no annual maintenance fees when account minimum thresholds are met.
Withdrawals
How do I request a withdrawal?
A beneficiary may take a withdrawal at any time by telephone or in writing, or they can establish automatic withdrawal to help meet the Required Minimum Distribution requirements by the IRS.
Am I required to take money out of the account?
Generally, Required Minimum Distributions (RMDs) from an inherited IRA must be made by December 31 following the year of death of the original owner. However, depending on various circumstances, an RMD can be deferred if the beneficiary is a spouse.
Death of the owner prior to 12/31/2019, a non-spouse beneficiary may have the option to distribute the entire amount by the end of the calendar year containing the fifth anniversary of the owner’s death. Or, distribute RMDs over the lifetime of the non-spouse beneficiary beginning the following year of death of the original owner.
Generally, this 5-year rule comes into play when the original owner did not name a beneficiary and they were not married at the date of death. In addition, it applies when the beneficiary is an entity, i.e., estate, charity or non-person.
As a result of the SECURE Act of 2019, if the original owner passes away after their Required Beginning Date (April 1st after age 72, i.e., death occur prior to 12/31/2022 or after age 73, i.e., death occurred prior to 12/31/2023), then a Non-Eligible Designated Beneficiary may need to take annual RMDs for the first 9 years beginning following the year of death of the original owner. Then by the 10th year, the amount must be depleted. The rules changed for non-spouse beneficiaries when the original owner passed away after 12/31/2019. A non-spouse beneficiary will generally be required to distribute inherited amounts within 10 years. However, RMDs over the non-spouse beneficiary lifetime could occur for those who, at the time of the account owner’s death, are
- disabled individuals,
- certain chronically ill individuals,
- beneficiaries whose age is within 10 year of the decedent’s age, and
- minors (they would begin a 10-year payout period upon reaching the age of majority)
Spouse Beneficiary
An inherited IRA may be an acceptable account type for a spouse that needs the flexibility of withdrawing assets prior to age 59½. Only a spouse beneficiary can treat an inherited IRA as their own for required distribution purposes.
Generally, RMDs must start the year following the year of death of the original owner. However, a spouse beneficiary may wait to take distributions until the original owner would have reached age 73 by 12/31/2024.
Non-Spouse Beneficiary
If you were not planning on receiving an inheritance or don’t need the assets to maintain your living costs, then as a non-spouse beneficiary, you may want to consider leaving the assets in an inherited IRA will taking distributions under the IRS-approved distribution methods, which could last over your lifetime as assets grow tax-deferred and if the account is an inherited Roth IRA tax-free (assuming the 5-year holding period is met).
Many financial institutions refer to these accounts as “Stretch IRAs” for beneficiaries. When moving an inherited IRA between financial institutions it may be preferred to do a transfer of assets oppose to taking physical receipt of the assets. Generally, a 60-day rollover is not available for non-spouse beneficiaries.
Due to the complexities of beneficiary options for an inherited IRA, it is recommended to seek professional tax advice.
For help calculating your RMD, please contact a Janus Henderson Retirement Specialist at 800.525.1093.
Related Content
Helpful information
Contact a Janus Henderson Representative
Our Janus Henderson Representatives will answer your questions and assist you through the movement of assets process. We are available at 800.525.3713 weekdays 9 a.m. to 6 p.m. EST.