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By Sarah Brenner, JD
Director of Retirement Education, Ed Slott and Company, LLC

Many IRA assets will ultimately go to nonspouse beneficiaries. When these beneficiaries inherit the funds, special rules kick in. Inherited IRAs are not like your own personal IRA account.

Seven rules for inherited IRAs that may surprise you if you are a nonspouse beneficiary:

1. You cannot contribute to your inherited IRA. You cannot make contributions to an inherited IRA. If you do have your own IRA, you cannot add those funds to the Inherited IRA or vice versa.

2. You can move your inherited IRA. If you are unhappy with the investment choices or the custodian, you can move your inherited IRA to another custodian, and you can select different investment options. However, you must move the account by direct transfer, and the new account must be an inherited IRA as well. As a nonspouse beneficiary, you cannot take a distribution and then roll it over within 60 days.

3. You may be able to do a QCD. If you are charitably inclined, you may be able to take advantage of a qualified charitable distribution (QCD) and move up to $100,000 of your IRA funds (annually) directly to the charity of your choice in a tax-free transfer. To do a QCD you must be 70 ½ or older.

4. You cannot convert your inherited IRA. Many times nonspouse beneficiaries are interested in having a Roth IRA. Unfortunately, the rules do not allow nonspouse IRA beneficiaries to convert inherited IRAs to Roth IRAs.

5. You may be subject to annual required distributions, or the 10-year rule at a minimum. You can’t keep the funds in your inherited IRA forever. If you inherited the IRA funds in 2020 or later, as a nonspouse beneficiary you will most like be subject to a 10-year payout-period, possibly with annual RMDs during the 10 year period. Certain eligible designated beneficiaries who inherit in 2020 or later and those beneficiaries who inherited prior to 2020 may be still be able to stretch RMDs over life expectancy.

6. Your distributions may be taxable, but there will be no penalty. Inherited IRAs are never subject to the 10% early distribution penalty. However, if you inherit a traditional IRA, it is likely that the distributions you take will be taxable. If you inherit a Roth IRA, you are more fortunate from a tax perspective. Distributions from an inherited Roth IRA will most likely be tax-free.

7. You should name a successor beneficiary. When you inherit an IRA, it makes sense to name a beneficiary. If you don’t, the default provisions in the IRA document are likely to apply. In many cases this would mean the funds would go to your estate which can mean more taxes and the time and expense of probate.

Gordon Wollman and Ed Slott

Gordon Wollman, Founder and President of Cornerstone Financial Solutions, and Raymond James Wealth Advisor, with Ed Slott at the 2023 Spring workshop for members of Ed Slott’s Elite and Master Elite IRA Advisor Group℠.

Membership in Ed Slott’s Elite IRA Advisor Group(TM)  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation.

ACKNOWLEDGMENT: This article was published in The Slott Report on irahelp.com by Ed Slott and Company, LLC, an organization providing timely IRA information and analysis to financial advisors, institutions, consumers, and media across the country and is distributed with its permission. Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, September 06, 2023, with permission https://www.irahelp.com/slottreport/rules-inherited-iras-may-surprise-nonspouse-beneficiaries. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Raymond James is not affiliated with and does not endorse the opinions or services of of Sarah Brenner, JD, The Slott Report, ED Slott, Ed Slott and Company, LLC, IRA Help, LLC, irahelp.com, or Ed Slott’s Master Elite IRA Advisor Group. Members of Ed Slott’s Elite IRA Advisor Group(SM) train with Ed Slott and his team of IRA Experts on a continuous basis. These advisors passed a background check, complete requisite training, attend semiannual workshops, webinars, and complete mandatory exams. They are immediately notified of changes to the tax laws.