Inherited individual retirement accounts (IRAs) have long been a method to allow non-spousal beneficiaries to inherit an IRA account andꩵ le๊t the account continue to grow on a tax-deferred basis over time. Rules governing IRAs and 401(k)s have changed throughout the years, though, so make sure you understand current guidelines.

Recent History of Inherited IRA, 401(k) Rules

In 2007, federal rules were changed to allow non-spousal 澳洲幸运5开奖号码历史查询:beneficiaries of 401(k)s and other defined contribution retirement plans to treat these accounts similarly. Then, on Dec. 20, 2019, the Settinꦦg Every Community Up for Retirement Enhancement (SECURE) Act was signed into law, eliminating the rules that had permitted the 澳洲幸运5开奖号码历史查询:stretch IRA strategy for lifelong sheltering of distributions from IRA accounts for any non-spouse who inherits a retirement account from someone who died after Dec. 31, 2019.

Inherited IRA Basics

Spousal beneficiaries of an IRA can take the account and manage it as if it were their own, including the calculation of 澳洲幸运5开奖号码历史查询:required minimum di꧂stribut𓆉ions (RMDs).

For non-spousal beneficiaries, an inherited IRA account 💞provides several option🎃s, including the ability to stretch the IRA over several years before taking distributions, letting it continue to grow tax-deferred.

Receipt of Roth IRA distributions doesn't incur a tax bill because you pay taxes on money contributed to the account, but withdrawing does remove those🐽 funds from further tax-sheltered growth in a Roth account.

Now, non-spousal beneficiaries have to take distributions from the total account within 10 years of the original account holder's death. If that account is a 澳洲幸运5开奖号码历史查询:traditional IRA, they owe taxes on each distribution at their current inc🅰ome tax rate.

It is important that IRA account holders who want to leave their accounts to non-spousal beneficiaries work with a 澳洲幸运5开奖号码历史查询:custodian that understands the complex rules surrounding these accounts. With most established custodians, this shouldn't be an issue. It is also essential that the account beneficiaries become aware of their options for the inherited account to minimize the tax impact as much as possible. Working with a knowledgeable financial advisor is a goo♊d idea in these situations.

Inherited 401(k) Rules

Prior to the 2007 rule changes mentioned above, the option for non-spousal beneficiaries to put inherited balances from a 401(k), or similar plans such as a 403(b), into an inherited IRA didn't exist. The 澳洲幸运5开奖号码历史查询:rules were changed to allow these beneficiaries to roll their inherited 401(k) balances direc🥂tly to an inherited IRA account.

Some plans will allow non-spousal beneficiaries to leave the balance in the plan and take RMDs over the beneficiary's lifetime (this will likely change because of the SECURE Act's IRA time limits). What you do with an inherited 401(k) as a non-spouse is tied to how old the account owner was when the plan is t🍌ransferred to the heir, along with the plan🥃’s specific distribution rules.

If the account owner hadn't yet turned 70 1/2, the employer plan may allow you to spread distributions out over your lifetime or over five years. With the five-year option, you may have to fully withdraw all assets and roll them into an inherited IRA account by the end of the fifth year after the original account owner’s death. Regardless, you’d owe income tax on the distributions.

It's important to note that the 2007 rule adjustments didn't make it mandatory for 澳洲幸运5开奖号码历史查询:retirement plans to offer this option. The plan sponsor may need to amend its plan 𝓰document to allow for these distributions.

If this is something you are considering for your heirs, you would be wise to check with your company's benefits department to confirm that it is an option and on how to complete the beneficiary designation form. If it isn't offered, you should ask your company to amend the plan accordingly, which is neither costly nor difficult.

Required Minimum Distributions

澳洲幸运5开奖号码历史查询:The rules governing RMDs for inherited IRAs or inherited 401(k)s used to hinge upon the age of the original account holder at the time of death. If the account holder hadn't reached the age at which they had to start taking RMDs, then the non-spouse beneficiary had two choices in the past (in addition to cashing out the account immediately, of course):

1. Withdraw the entire amount by the end of the fifth year following the account owner’s year of death, or
2. Stretch out the account based on their year-end age following the year of death by the owner.

The required percenta🦩ges were based on the IRS table in effect for their age at the time.

If the original account holder had reached age 70½ and was taking RMDs, then the non-spouse beneficiary had to continue taking a distribution🌠 each year. Previously, there was the option of creating a stretch IRA in which the RMDs were based upon the non-spouse beneficiary’s age versus the age of the original account holder.

This means the distribution amounts could be lower than those of the original account holder (assuming the beneficiary was younger). This allowed the beneficiary to "stretch" the account via tax-deferred growth over time, minimizing the tax impac𒆙t of the distributions.

Sometimes these benefits could be stretched out over several generations, with first-generation beneficiaries leav🦩ing their inherited accounts to second-generation beneficiaries. If the first-generation beneficiary was very young—a grandchild or gr🃏eat-grandchild—the impact could be spread over decades.

10-Year Rule

Now, under the SECURE Act, these distributions by the heir must empty the entire account within 10 years of the original account holder's death. This new law doesn't explicitly distinguish between IRAs whose account holders already were taking RMDs and those who weren't, so it seems likely that the new 10-year rule applies to both; however, beneficiaries should check with a tax advisor. Some exceptions to the rule exist, too.

Unlike with a traditional IRA account, custodians may or may not provide notification as to the required distribution amount. It's 澳洲幸运5开奖号码历史查询:incumbent upon beneficiaries to stay on top of this, as the penalties associated with not taking♓ the distributions are stiff.

Creditor Protection

As mentioned, the Supreme Court ruled that inherited IRA accounts don't offer the same protection from creditors in the event of bankruptcy, a lawsuit, or other situations as do regular IRA, 401(k), and other retirement accounts.

If you foresee this as an issue for your heirs, this might not be the route to go with your IRA or 401(k) account. Other estate planning vehicles, such as a trust, might be in order. Consult your f🌼inancial advisor🐎 or estate planning professional.

Commingling Accounts

As mentioned, the non-spouse 澳洲幸运5开奖号码历史查询:beneficiaries of inherited IRAs and 401(k)s can't blend these account balances with their own IRA or 401(k). Depending upon the circumstances, they may be able to commingle inherited account 🍰balances.

If they inherite🤪d more than one IRA or 401(k) from the same person, they might be able to combine account balances of the same type. For example, they could combine two inherited traditional IRA accounts into one. Again, this is complex stuff, so make sure that the custodian understands what is being done and that you consult with a qualified financial or tax advisor.

The Bottom Line

Inherited IRAs and 401(k)s can be a great vehicle for passing assets from these accounts to non-spousal beneficiaries, but the rules surrounding them are complex and subject to mistakes by beneficiaries, custodians, and plan sponsors. What's more, the tax rules have significantly changed, and previous plans may no longer represent the best course to take.

If you are looking to leave your IRA or 401(k) to 澳洲幸运5开奖号码历史查询:non-spousal beneficiaries, make sure to deal with a knowledgܫeable custodian and engage the services of a financial advisor who understands these complex rules to avoid costly errors🐼. Mistakes can result in unwanted tax bills for your heirs.