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What Happens to My IRA When I Die? – What Parents Should Know

When a parent dies there are many things to manage, and taking care of the finances can often be the most dreaded. From funeral preparation to paying off any debts, every added task can feel overwhelming. A parent with all accounts titled correctly or set up in a trust makes the transfer of accounts simple, quick, and inexpensive, easing the burden on their grieving children.

While proper titling is helpful, and the transfer of these accounts to an Inherited IRA account is relatively simple, this asset transfer begs the question, what should I do with this money?

Many of us are up to date on how and when we must take money from our own retirement accounts (Required distributions starting at age 72) but taking your required minimum distributions from an inherited retirement account can be much more confusing.

Beneficiaries of inherited retirement accounts can no longer “stretch” distributions over the course of their life expectancy. Before 2020 inherited retirement accounts could be distributed across the beneficiary’s lifetime, allowing the investment to grow tax-deferred (tax-free if a Roth IRA) for an extended period. Starting in 2020, the account must be distributed in entirety within 10 years of the original account owner’s death. While the IRS is more than happy to receive taxes on the full distribution all at once, unless the money is needed immediately, maximize the tax-deferred growth by either taking the distribution in 10 increments or in some cases leaving the assets in the account up until the end of the 10-year period makes more sense. Keep in mind this will increase your earned income in the year(s) of distribution which may result in an increased marginal tax rate (see chart). Consult a tax professional to determine the best course of action.

This new rule does not affect IRAs that were inherited before January 1st, 2020 or any spousal inherited IRAs. Spousal inherited retirement accounts are simply treated as a part of the surviving spouse’s retirement portfolio. The spouse will take required minimum distributions from this account just like any other retirement account they own at age 72. (There are other exceptions for minor children, disabled individuals, and people less than 10 years younger than the decedent which allows the continuation of the lifetime stretch).


This report is a publication of Demand Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.


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