Understanding Inherited IRAs: A Comprehensive Guide

The inherited IRA is a type of retirement account that is provided to a beneficiary when the primary account holder dies. With a traditional IRA, the account holder has to designate a specific beneficiary or multiple beneficiaries. Then, when the account holder dies, the money in the account will become the property of the beneficiary.

If the beneficiary was a spouse, they can roll the money over into their own IRA without any penalties. They can continue to contribute to the IRA as if all of the money were theirs.

If the beneficiary is not a spouse, they can no longer make contributions to the account. If the original account holder was taking distributions from the IRA, the beneficiary has to continue taking the same distributions. However, if the account holder did not start taking distributions, the new account holder will have a choice to make.

The new account holder can immediately begin taking distributions if they choose. If they do not want to immediately take distributions, they can postpone the process a bit. They have up to five years to get all of the money out of the IRA. This allows them to spread the income over a few years to lower the tax impact.