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What Must You Do If You Inherit an IRA?
If youre the non-spouse beneficiary of an IRA, you essentially have two options.
The first is to open your own, separate inherited IRA account.
The second option is to take a lump sum distribution.
If you inherit a traditional IRA, this can create serious federal or state income tax consequences.
In most cases, youll have to pay ordinary income tax on the full amount of the distribution.
How Have Distribution Rules Changed?
From there, you were required to take annual distributions based on your life expectancy.
This allowed beneficiaries to spread out the tax hit over their entire lifetimes.
However, things changed in 2020.
Now, theres a 10-year rule in effect for inherited IRAs.
Eligible designated beneficiaries or non-spouse beneficiaries must withdraw the entire amount of an inherited IRA within 10 years.
This results in a larger tax obligation over a shorter period.
Imagine, for example, that youre a 40-year-old andyou inherit an IRA.
Perhaps more importantly, spouse beneficiaries are not subject to the 10-year mandatory distribution rule.
Rather, youre allowed to distribute the IRA according to your own original schedule.
Caitlyn Moorheadcontributed to the reporting for this article.
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