Successor Beneficiary of Inherited IRA: What to Expect

As the successor beneficiary of an inherited IRA, you'll need to understand the rules and regulations surrounding these types of accounts. The IRS requires you to take distributions from the inherited IRA within a certain timeframe, typically five years from the original owner's date of death.

You'll have to take annual required minimum distributions (RMDs) from the inherited IRA, starting from the year after the original owner's death. This means you'll need to calculate and take out a certain percentage of the account balance each year.

The RMD amount is based on the original owner's age and the account balance at the time of their death. You can find this information in the original owner's IRA documents or by contacting the IRA custodian.

A different take: Inherited Ira from Non Spouse

A successor beneficiary is a beneficiary-of-a-beneficiary, taking over an inherited IRA after the primary beneficiary has passed away.

The primary beneficiary's death starts a new 10-year rule, requiring the successor beneficiary to empty the inherited IRA by a certain date.

Check this out: What Happens When the Beneficiary of an Inherited Ira Dies

As a successor beneficiary, you can maintain the tax-deferred status of inherited IRA funds, but your timeline to fully distribute the funds may differ from other IRA beneficiaries.

You must follow the same 10-year rule as the primary beneficiary, meaning you must empty the inherited IRA by 2030 in this case.

Recent IRS guidance has excused annual required minimum distributions (RMDs) for successor beneficiaries for 2021, 2022, and 2023, but future years remain unsettled.

As a successor beneficiary, you may be required to continue taking RMDs if the primary beneficiary was already taking them, but this is still unclear.

You can roll over both a Thrift Savings Plan and a separate Roth IRA in the same year, but you must understand the distinction between an IRA rollover and an IRA transfer.

A rollover involves distributing funds to you and then depositing them back into an IRA within 60 days, while a transfer moves funds directly from one IRA custodian to another.

Transfers are the best way to move funds between IRAs, as they avoid issues with the 60-day rule and the once-per-year rollover rule.

Additional reading: Successor Beneficiary of Inherited Ira Rmd

Life expectancy payments are calculated using either the original beneficiary's or the IRA owner's age, not the successor beneficiary's age.

The payments schedule remains the same for the successor beneficiary, who must continue taking the same distributions as the original beneficiary.

The successor beneficiary must distribute the entire account by the end of the 10th year following the IRA owner's death.

There is no option for the original beneficiary's spouse to treat the inherited IRA as their own.

A nonperson successor beneficiary, such as a charity or trust, must also follow the same distribution schedule as the original beneficiary.

If this caught your attention, see: Ally Bank Beneficiary

You can roll over your Thrift Savings Plan to a traditional IRA at a brokerage and your separate Roth IRA to a larger Roth in the same year, but it's essential to understand the distinction between an IRA rollover and an IRA transfer. A transfer is the best way to move funds between IRAs, as it avoids issues with the 60-day rule and the once-per-year rollover rule.

On a similar theme: Inherited Ira 10-year Rule Example

If you do a rollover, the funds are distributed to you and then within 60 days you deposit those funds back into an IRA, whereas a transfer moves funds directly from one IRA custodian to another IRA custodian. You can do as many transfers as you want during a 12-month period, but a rollover from one IRA can prevent you from doing a 60-day rollover with another IRA within 12 months of the prior distribution.

The once-per-year rollover rule only applies to IRAs and not to plans, so your rollover from your Thrift Savings Plan won't prevent you from doing a 60-day rollover with your Roth IRA.

Curious to learn more? Check out: 60 Day Rollover Inherited Ira

If the original IRA owner passed away before 2020, the Successor Beneficiary of the Inherited IRA is bound by the 10-year rule, requiring them to deplete the account entirely within 10 years of inheriting it.

There are two main factors that determine the distribution rules for Successor Beneficiaries of an Inherited IRA: the date of death of the original IRA owner and whether the original beneficiary was an "Eligible Designated Beneficiary" or a "Non-Eligible Designated Beneficiary."

An Eligible Designated Beneficiary is classified as such if they meet one of the following criteria: spouse of the decedent, minor child of the decedent, not more than 10 years younger than the decedent, or a disabled or chronically ill individual.

Here are the three potential distribution rules for successor beneficiaries of an Inherited IRA, based on the classifications of the original beneficiary:

If the original beneficiary had been using the 10-year rule, the successor beneficiary must continue to use the 10-year rule using the life expectancy of the original beneficiary.