It’s an emotional time. Your loved one has just passed, and now you are left figuring out what to do with the money you have inherited. And everything you may have known about this topic changed with the passing of new rules in the SECURE Act in 2019. So, I am going to walk you through some things you need to know if you are inheriting investments as a spouse, and my next blog will go through how this is different if you are inheriting as a non-spouse.
Spouses have several options when they inherit a retirement account such as an IRA:
- They can roll the account into their own IRA in their own name. RMD’s are based on the age of the inheriting spouse, not the original owner, but early withdrawal penalties may apply.
- They can roll the account into an Inherited IRA. RMD’s are based on the original owner’s age (or else the account needs to be emptied within 10 years), but with no early withdrawal penalties.
- They can cash out the account and pay taxes immediately on any taxable income, with no early withdrawal penalties even if under the age of 59 ½.
Special Rules for Inherited Roth IRA’s
Roth IRA’s don’t typically have RMD’s but the government doesn’t want Roth money to grow tax-free forever. So moving your money into an Inherited Roth IRA will result in RMD’s based on the age of the original owner, or the account will have to be emptied within 10 years. No taxes will typically apply with these distributions, unless the original Roth account was open for less than 5 years prior to death.
This is somewhat less complicated than the IRA rules, and it was not affected by the passing of the SECURE Act. Investments in non-retirement accounts continue to get a free step-up in basis, which means that taxes are not due on any investment gains. The new cost basis for these investments will be their price on the date of death (or alternatively, 6 months after the date of death). These investments can be immediately sold or can be moved as is into a similar investment account in the beneficiary’s name, with no immediate tax consequences.
You may get the impression here that the rules pertaining to inheriting investments are complicated. And that is before accounting for the exceptions and additional details that I wasn’t able to cover in this space! I would highly recommend getting the help of financial and tax professionals to determine the best course of action for your unique situation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.