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There are different rules for inherited retirement accounts.
When you build your own retirement account, you can contribute new money into that portfolio. You can also leave it in place until you need it, subject only to RMDs (Required Minimum Distributions) that kick in around age 73 for pre-tax portfolios.
When you inherit a retirement account, however, you don’t have those options. You cannot make new contributions to this portfolio, and in most cases you will have to withdraw it all within 10 years.
This can raise particularly difficult questions for high-income households. If you’re on the upper end of tax brackets, pulling money out of a pre-tax portfolio can trigger pretty significant tax payments, costing you much of the money that you’re trying to save. For example, say that you inherit $675,000 held in an IRA, but you’re currently in the 32% tax bracket.
Here are some things to think about when you approach this account. A financial advisor can help you navigate the nuances of the rules surrounding inherited IRAs and their impact on your taxes. Use this free tool to match with a financial advisor.
Inheriting a tax-advantaged retirement account, like a 401(k) or an IRA, is subject to different rules than opening and holding one yourself. These rules are based on two categories of heirs known, in the helpful language of the IRS, as “Eligible Designated Beneficiaries” and “Designated Beneficiaries.”
If you are an eligible designated beneficiary, you have broad flexibility in how you handle this account. You can, if you choose, simply leave the money in place and take withdrawals based on your financial plan. If the original owner had not begun taking RMDs, you will take minimum distributions based on your own age. If the original owner had begun taking RMDs, you must continue doing so.
Alternatively, you can transfer the money to another inherited IRA or into your own IRA. In this case, you can manage this money based on the rules of the new account and you will take minimum distributions based on your own age.
Anyone else who inherits a retirement account is known as a “designated beneficiary.” In this case, there is a special required minimum distribution known as the 10 Year Rule. This rule requires you to withdraw all funds from the account by December 31 of the 10th year after the original owner’s death. For example, if the original owner died on August 1, 2022, you have until December 31, 2032 to empty the account. (Note: If the original owner died before 2020, you must empty the account within five years of the owner’s passing.)