What Happens to Your IRA When You Die -- and What Your Heirs Need to Know
Key Points
IRAs should pass to your designated beneficiaries, who typically have 10 years to withdraw all funds from the account.
Spouses can roll inherited IRA funds into their own IRA.
The beneficiary will owe taxes on withdrawals from inherited traditional IRAs.
- The $23,760 Social Security bonus most retirees completely overlook ›
Finding yourself with more money than you can spend at the end of your life is far from the worst problem you could have, but it does raise some questions. Who do you leave that money to? And how much will they actually get to keep?
The answer to the first question is up to you, but the government has a say in the second one. Here's what you and your heirs need to know about the rules governing inherited IRAs.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
How inherited IRAs pass to your heirs
Inherited IRAs usually don't go through probate if you have named beneficiaries. Those accounts will go directly to whomever you decided should receive the funds, whether they're your spouse, child, niece or nephew, or a family friend.
If you name more than one person as a beneficiary, each will be entitled to a portion of your IRA. That money typically goes into an inherited IRA in their name.
However, if you're leaving your remaining savings to your spouse, they have the option to roll that money over into their own IRA. Doing this lets them delay withdrawals until they're ready, but it also prevents them from accessing the money without penalty before age 59 1/2.
Inherited IRA withdrawal rules
Most IRA beneficiaries must follow the 10-year rule for their savings. Spouses have this option as well. It states that you must withdraw all the funds from the inherited IRA by the end of the 10th year following the year of the original owner's death. So if you die in 2026, your heirs would have until Dec. 31, 2037, to withdraw all the funds from the inherited IRA.
If the money comes from a traditional IRA, they will owe taxes on their withdrawals at their ordinary income tax rate. If the money comes from a Roth account, withdrawals are usually tax-free.
Certain beneficiaries can choose to spread their withdrawals out over a longer time period by taking required minimum distributions (RMDs). This option is only available to:
- Spouse of the original account owner
- Minor child of the original account owner (may only use this approach until they turn 18)
- Disabled or chronically ill beneficiaries
- Beneficiaries not more than 10 years younger than the original owner
You're free to withdraw more than the RMD amount if you prefer. But spreading your savings out over time can minimize the tax impact on you in any given year and give your investments more time to grow.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
Recommended Articles
