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Do’s and Don’ts for IRA Beneficiaries

December 12, 2023

Inheriting an IRA, as welcome as it may be, comes with complications. If you are a surviving spouse, there are special favorable choices for you, and this article is not for you. Nonspouse beneficiaries need to know a number of rules.

Do not contribute to your inherited IRA. This is not allowed, because the requirements for personal and inherited IRAs are different.

Do not try to convert your inherited IRA to a Roth IRA. This is not allowed.

Do change IRA custodians if you are not happy. However, moving the IRA to a new custodian must be done by direct transfer. Do not try to take a distribution and roll it over in 60 days, as this approach is not available for nonspouse beneficiaries of inherited IRAs.

Do take distributions from the inherited IRA, regardless of your age. If it is a traditional IRA, there will be income taxes to pay, but no penalty taxes, even if you are under age 59½. If it is a Roth IRA, there will be no taxes or penalties.

Do not leave the money in the inherited IRA for more than ten years. With a few limited exceptions, the money in an inherited IRA must be disgorged in ten years. In some cases, there may be annual Required Minimum Distributions before the ten years are up.

Do name a successor beneficiary. Failure to name a beneficiary can add time and cost to estate settlement.

Do consider a Qualified Charitable Distribution (QCD). If you are age 70 ½ or older, you may direct a transfer of up to $100,000 from your inherited IRA to a qualified charity. The amount of the transfer will not be included in your taxable income (which means you don’t get a corresponding tax deduction if you itemize).

If you don’t already have a professional tax advisor, inheriting a substantial IRA is a good time to consider getting one.

(September 2023)

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Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.