Inheriting an IRA: What You Need to Know

The goal for many people later in life is to make sure their children and loved ones are financially set after they are gone. But when you lose a parent or loved one, one of the last things on your mind is understanding what options are available for what they've passed on to you.

If you've inherited an Individual Retirement Account (IRA), you'll need to make some important decisions. While it might feel overwhelming to grasp the rules and options while you're grieving, we'll break down the information you'll need to make the best decision for your situation.

Understanding taxes on inherited IRAs

One question that might immediately come to mind is how you'll be taxed on an inherited IRA. The answer depends on the type of IRA and what you choose to do with it:

• Roth IRA. Qualified distributions from Roth IRAs are not taxable, and this includes inherited Roth IRAs. However, the five-year rule still applies: If less than five years have passed since the first Roth contribution was made, then the earnings are taxable.
• Traditional IRA. With this type of IRA, distributions are included in your income and taxed accordingly. If the IRA includes an after-tax balance, then this portion is not taxable when withdrawn. There is no early withdrawal penalty no matter your age.

Your distribution options

As an IRA beneficiary, your distribution options will depend on these factors:

• What the IRA plan agreement allows
• When the IRA owner died
• Your age and relationship to the IRA owner

The options described here are allowed by federal laws and IRS regulations, but the plan agreement for the IRA you've inherited may be more restrictive. Check with your financial institution about your specific distribution options.

For an in-depth view of what your options are based on the above factors, visit our new Inherited IRA product page.