The Rules for Inherited IRA CDs

Certificates of deposit are fixed-income investments in which you are guaranteed a certain return if you invest your money for a prescribed period of time. The rules for inherited certificates of deposit (CDs) held within individual retirement arrangements, or IRAs, are the same as for any other individual retirement arrangement, except that certain provisions apply specifically to early withdrawals on certificates of deposit.

What's an Inherited IRA CD?

CDs are typically considered to be conservative investment accounts. The largest benefit of a CD is a guaranteed return on investment, which can be an attractive feature for retirement investing. Normally, CDs are savings accounts purchased directly from a bank or other financial institution, but they can also be purchased through an IRA. Citizens Bank indicates that there are multiple pros and cons that should be considered before deciding on IRA CDs such as their low-risk nature and limited growth potential.

Generally, CD interest is taxable. You may even receive a 1099 form from the bank detailing taxable interest earned during the year. However, this provision does not apply to CDs held within an IRA account. Interest on CDs held in IRAs grows tax-deferred, and in the case of Roth IRAs, tax-free, provided the money has remained in the account at least ​five years​.

Inherited IRAs that contain CDs are not treated differently from other comparable types of IRAs. The rules for inheriting IRAs are outlined by the IRS.

What Are the Rules for Spouses?

Spouses are considered eligible designated beneficiaries, which means they may treat an inherited IRA as their own. roll the account over to her own IRA account, or to otherwise treat her deceased spouse's IRA as her own. This allows her to use her own life expectancy to determine required minimum distributions (RMDs) rather than her late spouse's.

What Are the Rules for Non-Spouse Beneficiaries?

Only spouses can elect to be treated as the original owner for tax purposes. This means that non-spouse beneficiaries must generally adhere to the required minimum distribution schedule of the original owner. The SECURE Act of 2019 eliminated the option for a "stretch IRA" and requires non-spouse beneficiaries to fully distribute the IRA within ​10 years​ of the anniversary of death. RMDs are required each year through the ​ninth year​, with the full balance being withdrawn in ​year 10​. This is known as the ​10-year rule​.

Non-spouse beneficiaries may not contribute to the IRA or roll it over, however, trustee-to-trustee transfers are permitted by the IRS. Trusts cannot be considered a designated beneficiary for an IRA. Rather the beneficiaries of the trust will be treated as designated beneficiaries for the purpose of calculating RMDs.

What If an Owner Dies Before RMDs Commence?

If the owner of the original account passes away before his required beginning distribution date, a spouse may take RMDs over their remaining life expectancy. Spouses are not obligated to take RMDs until the year when the original owner would have reached the ​age of 72​. If the ten-year rule applies, then no RMD is required other than a total distribution in ​year 10​. If the beneficiary is not a single person or is not a person (such as an estate), then the IRA must be fully distributed by the end of the ​fifth year​ after the death.

How Are Roth IRAs Different?

If you inherit your CDs in a Roth IRA account from your deceased spouse, and you are the sole beneficiary on the account, you can elect to treat the Roth IRA as your own and you don't need to take required minimum distributions. However, if you do not treat the Roth as your own, or you are not the surviving spouse, or you are not the sole beneficiary, you must take required minimum distributions over your own remaining life expectancy on a Roth IRA.