My father recently died and all his monetary accounts were POD to me and my brother. The lady at the investment service was very helpful, but I still don’t understand the 10 year rule. She said I was required by the IRS to take it all out of his IRA in 10 years. I can’t leave it like I want to. Not asking for financial advice (I know the sub for that), just an explanation of how this rule works. Thanks.
In: Economics
There’s not really much anyone can give for an explanation because it’s just an IRS rule. But the rule is that, since you are a non-spouse beneficiary, you must deplete the IRA within 10 years. You can deplete the whole thing in year one, you can wait and do it all in year 10, or you can do equal distributions over the course of the whole 10 years. Or anything else you want. The only thing that matters is that it’s empty by the end of 10 years. HOWEVER, if your dad was taking RMDs you will have to as well.
Assuming it is a traditional IRA any distribution you take will be included in, and taxed, as ordinary income. You will get a 1099R to report this on your taxes. That may mean taking a total distribution in any one year could result in a less favorable tax situation for you than taking more equal distributions, however I don’t know your tax situation so I can’t say for sure.
IRA are accounts specifically for saving for retirement where, depending on the type, either the gains aren’t taxed or the initial deposits aren’t taxed. There is a limit to how much can be contributed to these a year, and any individual can only open a single IRA, because the government doesn’t want to allow people to avoid these taxes on all their income. Allowing IRAs to be inherited without restriction would effectively allow bypassing this limit, so there is a stipulation that you cannot just hold on to the IRA indefinitely.
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