Rules of an Inherited Traditional IRA

When inheriting a traditional IRA in a non-spousal relationship, you have different options based on the age of the original account holder of the traditional IRA.

If the account holder was under 70 1/2 you have three options:

Life Expectancy Method:

• annual distributions over your life expectancy based on your age in the calendar year following the year of death of account holder and reevaluated each year.
• Required Minimum Distributions are mandatory and you are taxed on each distribution.
• Distributions must begin no later than 12/31 of the year after the original account holder died.
• If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death, otherwise, distributions will be based on the oldest beneficiary.

Five Year Method:

• Withdraw money at any time until 12/31 of the fifth year after the year in which the account holder died, all assets must be fully distributed by this time.
• You are taxed on each distribution.

Lump Sum Distribution:

• All assets in the IRA are distributed at once.
• You will pay income tax on the distribution all at once.

If the account holder was over 70 1/2 you have two options:

Life Expectancy Method:

• Annual distributions based on your life expectancy or the life expectancy of the original account holder, whichever is longer.
• Required Minimum Distributions are mandatory and you are taxed on each distribution.
• Distributions must begin no later than 12/31 of the year after the original account holder died.
• If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death, otherwise, distributions will be based on the oldest beneficiary.

Lump Sum Distribution:

• All assets in the IRA are distributed at once.
• You will pay income tax on the distribution all at once.

No matter what option you choose there will not be a 10% early withdrawal penalty.

Please remember that all distributions will be taxed as ordinary income, so they may affect your income bracket based on the amount of the distribution.

If you have further questions please contact us today.

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Bel Air and Columbia, Maryland.