Whether you have to set up an inherited individual retirement account (IRA) by the end of the year following the decedent's death depends upon your relationship to the decedent. The Internal Revenue Service (IRS) has different rules for surviving spouses and other beneficiaries. In most cases, an inherited IRA account for the beneficiary must be set up by December 31 in the year after the original owner's death.
Required Minimum Distributions
With the exception of spouses, all beneficiaries inheriting IRAs must take required minimum distributions (RMD) from the account starting in the first year after the decedent's death. To calculate the RMD, divide the value of the inherited as of December 31 of the death year, by your single life expectancy (SLE) factor. Inherited IRA owners neglecting to take the RMD may face IRS penalties of up to 50 percent of the funds that should have been withdrawn.
Spousal IRA Inheritances
The surviving spouse inheriting an IRA has three options concerning the account. He has the option of treating the late spouse's IRA as his own, unlike any other category of beneficiary. The surviving spouse must roll over the account within 60 days of the decedent's death. If the spouse is not the sole beneficiary, he may still roll over his percentage of the inherited IRA into his own account. The surviving spouse may also use the options available to non-spousal beneficiaries.
Any non-spousal beneficiary of an inherited IRA should set up his own inherited IRA account by the last day of the year following the decedent's date of death. If there are multiple beneficiaries to IRA assets, they must set up their own inherited IRA accounts with their percentage of the assets by this date. Once the inherited account is created, the new owner can use the SLE payout, which stretches distributions based on the new owner's lifetime. If the decedent passed before the age of 70 1/2, the new owner may receive all assets within five years of the decedent's death date. However, if the decedent was required to take a distribution in the year he died and did not, it must be taken by the inherited IRA beneficiary.
The IRS does not permit inherited IRAs to qualify for the 60-day rollover provision permitted for other IRAs. Ordinarily, an IRA account holder may withdraw funds from the IRA, and if returning the money to the account within the 60-day period, avoids income taxes or IRS penalties. Because inherited IRAs are ineligible, any money withdrawn from the account is taxable. The IRS does not charge the 10 percent additional tax on early withdrawals for distributions from non-spousal inherited IRAs, no matter the age of beneficiary.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.