If you have inherited an individual retirement account (IRA), you may want to transfer the funds into an inherited IRA, also known as a beneficiary IRA. This type of inheritance typically comes from a parent, spouse or other family member, but could come from anyone.

Here are the key issues to consider if you have inherited an IRA:

Required Minimum Distributions (RMD)

In general, you must start taking withdrawals from your IRA or retirement plan account when you reach age 70½.   Failure to do so may result in IRS penalties.  The minimum amount you must withdraw each year is called your required minimum distribution.

The required minimum distributions and withdrawal options vary based on many factors including your own life expectancy. Generally, the required minimum distribution (RMD) begins the year after the year of death. To calculate the RMD, take the fair market value of your beneficiary IRA (as of December 31st on the year of death) and divide it by the proper value from the Single Life Expectancy table (available at www.IRS.gov).

Withdrawals are taxable income, so you may want to leave as much of the balance as possible in the tax-deferred Beneficiary IRA. Correctly calculating the RMD is important, as failure to withdraw the required minimum distribution can result in a hefty tax penalty.

The Five-Year Rule

One way to minimize concerns about correctly calculating RMDs (or even eliminate them completely) is to use the five-year rule for your distribution. By utilizing the five-year method you can withdraw the funds however you choose, as long as the account is completely empty by the fifth anniversary following the original IRA holder’s death.  This option is not available to the beneficiary if the original IRA holder died after having started his/her required minimum distributions.

Death of a Spouse

If your Beneficiary IRA originally belonged to your spouse, you have an additional options.  Aside from the standard RMD option and the five-year rule, you have the option of transferring the account to your own name and deferring the required minimum distribution until you reach that age. And, if you are over 70 ½, transferring the account into your name allows you to calculate the RMD based upon figures in the Joint Expectancy table.

Multiple Beneficiaries

Often a person names more than one beneficiary to their IRA account. If this is the case, you can choose to keep the funds in one account, wherein the oldest beneficiary’s age would be used to calculate the RMD. Alternatively, you can separate the funds into individual accounts. If you decide to create individual accounts, you must do so by December 31st of the year following the year of death.

Passing it On

You do not have to accept the inherited IRA, but you’ll need to decide quickly. You have only a few months from the date of death to deny the inheritance and let it pass to the next beneficiary.

beneficiary ira, inherited ira

Making decisions regarding Beneficiary IRAs can be complex, but there are many resources available to assist you. Educate yourself on all the options, so you’ll be able to make the right decision for you.


Before making an investment decision, please consult with your financial advisor about your individual situation.  You should discuss any tax or legal matters with the appropriate professional.

Sara Stanich