Do I have to withdraw from my inherited IRA?
Receiving an inherited IRA can be a complex and overwhelming situation, especially when it comes to understanding the tax implications and withdrawal requirements. One of the most common questions inheritors have is whether they are required to withdraw funds from the inherited IRA. The answer to this question depends on several factors, including the type of IRA, the relationship between the original account holder and the inheritor, and the inherited IRA’s designated beneficiary.
Type of IRA:
Firstly, it’s important to determine the type of IRA you’ve inherited. There are two main types: Traditional IRA and Roth IRA. The withdrawal rules for each type differ significantly.
Traditional IRA:
With a traditional IRA, the inheritor is generally required to withdraw the funds within a specific time frame. The rules state that the entire balance must be withdrawn by the end of the fifth year following the year of the original account holder’s death. If the inherited IRA is a designated beneficiary IRA, the inheritor may have the option to take distributions over their lifetime or over a set number of years, known as the life expectancy period.
Roth IRA:
In contrast, with a Roth IRA, the inherited funds are not subject to required minimum distributions (RMDs) for the inheritor. However, the inheritor may still be required to take distributions if the original account holder passed away before reaching age 72. If the inheritor is not subject to RMDs, they can choose to withdraw the funds at any time without tax penalties.
Relationship to the Original Account Holder:
The relationship between the original account holder and the inheritor also plays a role in determining withdrawal requirements. For example, if the inheritor is the surviving spouse, they may have the option to treat the inherited IRA as their own and continue making contributions, provided they meet certain criteria. However, if the inheritor is not the surviving spouse, they must adhere to the withdrawal rules mentioned earlier.
Designated Beneficiary:
The designated beneficiary of the inherited IRA also affects the withdrawal requirements. If the original account holder designated a specific individual or entity as the beneficiary, the inheritor must follow the withdrawal rules set forth for that designated beneficiary.
In conclusion:
Whether you have to withdraw from your inherited IRA depends on the type of IRA, your relationship to the original account holder, and the designated beneficiary. It’s essential to consult with a financial advisor or tax professional to understand the specific rules and regulations that apply to your situation. Failure to comply with the withdrawal requirements can result in penalties and tax consequences.
