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 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.
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.
Rules for Spouses
A spouse who is named as beneficiary on an IRA can choose to roll the account over to her own IRA account, or to treat her deceased spouse's IRA as her own. This allows her to use her own life expectancy to determine required minimum distributions rather than her late spouse's.
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. If the original owner died on or after the date he was required to begin taking minimum distributions, then the IRS allows the beneficiary to take distributions according to his own life expectancy, as opposed to that of the deceased's age cohort. However, if the beneficiary is older than the deceased, the law allows the beneficiary to elect to take RMDs according to the deceased's schedule.
Owner Dies Before RMDs Commence
If the owner of the original account passes away before his required beginning distribution date, the beneficiary must take RMDs over his remaining life expectancy.
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.
- Internal Revenue Service: Publication 590
- The Charles Schwab Corporation. "Inherited IRA Withdrawal Rules." Accessed Jan. 30, 2020.
- Fidelity Investments. "If You Are a Nonspouse IRA Beneficiary." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Retirement Topics - Beneficiary." Accessed Jan. 30, 2020.
- Internal Revenue Service. "Publication 590-B (2018), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Jan. 30, 2020.
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Jan. 30, 2020.
- Congressional Research Service. "Inherited or “Stretch” Individual Retirement Accounts (Iras) and Related Legislation in the 116th Congress," Pages 1–2. Accessed Jan. 30, 2020.
- Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs." Accessed Jan. 30, 2020.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.