Inheriting a Traditional IRA Account

Inheriting an IRA account can provide you with a nice sum of money, depending on the situation. When you inherit an IRA, there are several things that you will want to consider. Here are the basics of inheriting a traditional IRA account and what your options are. 

Inherited IRA

One option that everyone has when they are the beneficiary to an IRA is to start an inherited IRA. An inherited IRA is an account that allows the assets from the original IRA to be transferred into it. The inherited IRA will then be in the name of the beneficiary. With an inherited IRA, you can start taking out the cash almost immediately. In fact, you have to start taking mandatory distributions by December 31st of the year following the person's death.

You also have the option of taking a lump sum of money from the IRA. However, when you do this, since the money will be counted as taxable income, it could significantly raise your tax burden. Therefore, many people will just take small, regular distributions from the inherited IRA so as to minimize their tax burden.

The money in an inherited IRA can not be rolled over into another IRA. Therefore, it is basically just an account that you can withdraw the money from over time if you choose. 

Spouse Options

If you are the spouse of the deceased, you actually have another option. While you can start an inherited IRA account if you choose, you do not necessarily have to. You can roll the funds from their IRA over into your own IRA. You are then free to treat the funds as if they were your own. With this method, you can continue making contributions and taking advantage of the tax-deferment. 

If you choose this option, the rules are now based on your own age instead of the age of the deceased. Therefore, if you are over the age of 59 1/2, you could start taking withdrawals from the account. If you do not want to withdraw, you could put it off until you are 70 1/2. 


If you are a spouse, you can really use these options to your advantage depending on the situation. For example, if your spouse was over 70 1/2, but you are not, you can roll the funds into your account and then delay taking distributions until you reach that age. This gives you additional time to earn interest tax-free. 

If you are under the age of 59 1/2, you can also use this situation to your advantage if you want to start taking distributions. If you were to roll the funds into your own IRA and withdraw them, you would have to pay a 10% penalty. However, in this case, you can just take the funds in an inherited IRA and start withdrawing them immediately with no penalty.

blog comments powered by Disqus