Inherited Individual Retirement Account From A Non-Spouse

Last Updated on 16th June 2022 by Jeffrey Camerda

Inheriting an IRA from a parent, grandparent, aunt, uncle, or even a sibling or acquaintance is becoming more prevalent as the U.S. population ages. When you’re nearing retirement, you’re more likely to experience this. It’s up to you on how you handle this IRA (unless you inherited an IRA from your spouse, then different options apply).

A common misconception is that an inherited IRA may be rolled over into one’s own account. The only exception to this is when you inherit an Individual Retirement Account (IRA) from a person other than your spouse.

The Most Important Things to Remember;

  • When an IRA is designated as a beneficiary, the stipulations of a will or trust do not apply.
  • There is no early-withdrawal tax penalty for cashing in an inherited IRA, but you must do it within the next 10 years or face a penalty of 10%.
  • According to the SECURE Act, which went into effect on December 20, 2019, beneficiaries of IRAs who aren’t spouses must withdraw their IRA funds by December 31 of the tenth year after their decedent’s death in order to avoid penalties.
  • If their donor died before January 1, 2020, certain beneficiaries may be excluded from the SECURE Act requirement.

Withdraw the Funds From Your IRA Within 10 years

An inherited IRA may be cashed out at any time. On the other hand, you won’t have to pay a 10% IRA early-withdrawal penalty tax on the amount of the distribution you take. By Dec. 31 of the 10th year after a deceased person’s death, you must cash in the full inherited IRA. Despite the fact that there is no penalty tax, this may not be the best choice for you. Cashing in a big Individual Retirement Account might result in federal taxes of up to 37%. In addition to federal taxes, state income taxes will also be levied.

In order for a trust or corporation to be a beneficiary, it must have been designated by the original owner. If the beneficiary is a trust or a corporation, the regulations are different.

An Exception to 10-Year Rule

Beneficiaries under the age of 10 years old and whose spouse or minor kid is the account owner are exempt from this 10-year rule. So are beneficiaries who are handicapped or have chronic illnesses who are under the age of 10 years old and whose spouse or minor child are also exempt from this rule. These recipients have the ability to “stretch” their payments throughout their lifetimes.

Stretch IRAs for Deaths Before 2020

As a beneficiary, you must follow a certain set of criteria to obtain annual minimum distributions from the inherited IRA based on your life expectancy. They’re known as “required minimum distributions” (RMDs) (RMDs).

Stretch IRAs as a Financial Planning Tool

As a beneficiary with an inherited IRA, you had the option of taking RMD distributions over a longer period of time until the 2019 SECURE Act came into effect. The term “stretch IRA” was often used to describe this option of taking withdrawals throughout the course of your life expectancy. This was a great alternative since you could always get your money out earlier if necessary. The RMD guidelines just specified the bare minimum amount you were required to save. The ability to withdraw more than the minimal amount was always available.

Your first required minimum distribution from a stretch IRA must be made by December 31 of the year after the year in which the original IRA owner passed away if you are the beneficiary. To figure out the needed minimum distribution, you’ll need the following data:

  • The year in which the original IRA owner passed away, as of December 31 of the year in question.
  • The account balance as of December 31, 2014.

The following are the actions you should do based on the information you’ve just reviewed:

  • Table I of IRS Publication 590 provides your life expectancy as a non-spouse beneficiary. As of the first thing in the list above, your age is 1.
  • This life expectancy is multiplied by the previous year’s end account balance (item 2 in the preceding list). That’s the amount you’ll have to withdraw in the first year you’ll have to take a distribution from your retirement account.
  • The new divisor to use each year is your previous year’s life expectancy minus one.

You could lessen your taxable income by using the stretch option, which reduced the amount of tax you had to pay on the withdrawals.

The extended IRA option is available if the original IRA owner passed away before the end of 2019. IRAs are subject to the SECURE Act’s restrictions if the original owner dies after January 1, 2020. As a result, non-spousal heirs must take their whole inheritance out of the beneficiary’s IRA or 401(k) by the end of the tenth year after the beneficiary’s death.

When IRAs Are Passed Down Through Trusts or Other Entities

There is a separate set of standards that apply if you represent a trust or other entity that is not an individual person. For the most part, you will have to cash in the IRA within the next five years (not 10). To calculate required minimum distributions (RMDs), the trust’s beneficiaries who are themselves are recognized as designated IRA beneficiaries.

When it comes to taxes, you may end up paying more than you need to. Cashing out triggers income taxes, and failure to make required minimum distributions (RMDs) may result in excise taxes of up to 50%. Prior to making any decisions, consult a financial advisor. Remember that you have a long time to act. Making a hasty judgment might result in the occurrence of taxable events.

Make a Plan for Your IRA and Choose a Beneficiary

The beneficiaries of an IRA may override a will or trust. Check to see whether the beneficiaries on your IRAs have been updated. Consider asking family members whether you are a beneficiary on their financial plans if it is safe to do so. When a loved one dies, it might be useful to have that knowledge.


Q: Can I take money out of an inherited IRA as soon as it becomes available?

A: This year’s SECURE Act of 2019 mandated that non-spouse beneficiaries of an inherited IRA remove all of the monies within 10 years. There was no longer a so-called “stretch” IRA, which allowed payments to be deferred indefinitely (as long as RMDs are taken). It is still possible to employ the “stretch” strategy for certain beneficiaries, such as spouses and children.


Q: Is there a penalty if I withdraw money from an inherited IRA?

A: Inheritances in an IRA are yours to do with as you like. If you cash in an inherited IRA, you won’t be hit with a 10% early withdrawal penalty. Withdrawals, on the other hand, trigger income taxes, which may be substantial if you take money out of a big account all at once.


Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning.With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USAIn addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research.Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise.In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client.In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering.Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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