After the passing of a loved one, particularly if they are of an older age upon their passing, it is not uncommon that you might be the beneficiary of their IRA account. As you may well know, an IRA is an individual retirement account and it has certain rules regarding when the owner of the account can access the money that has been saved and invested. If you access the money in your IRA before reaching the age of 59 ½, you will incur a 10% penalty on any amount withdrawn. However, you must start taking out what is known as the “required minimum distribution” after reaching the age of 72. So, how does that affect loved ones who may inherit an IRA?
If you are the spouse of the decedent, you will have the most options available to you. If you are listed as the sole beneficiary on the account, you are allowed to essentially treat the account as if it were your own. You can either keep it separate from any IRA account you may personally have or you can “roll it over” into your personal IRA account, to simplify the process and avoid having two accounts to manage. As the spouse, you also have the option to go by the age of your spouse for withdrawing funds or you can go by your own age.
If your spouse passes away before reaching the age of 72 (current age as of 2023), and you choose to go by their age, you have the option of taking the money out over the course of five years following their death. You are allowed to decide how much and when to make these withdrawals, but the entire account must be depleted within five years’ time. If you choose to cash out the entire account at once, you will be subject to income taxes on the entire amount.
If your spouse passes away after reaching the age requirement, you can pull out the money throughout the time period that would have been the life expectancy of the decedent.
For everyone else (not a spouse), if the holder of the IRA passes either before or after the age requirement, you, as the beneficiary, get to choose between a 5 year and a 10 year plan. With the 5 year plan, you have five years to deplete the account, choosing when to make certain withdrawals and choosing how much to withdraw at those times. There is no difference with the 10 year plan, except that you have five extra years to cash out the entirety of the account.
For more information on IRAs, please visit the IRS website (link below).