The 5-year rule applies to distributions from an inherited IRA. To withdraw profits from an inherited IRA, the account must have been open for a minimum of five years at the time of the original account holder's death. Basically, if you have inherited an IRA from someone other than your spouse, such as a family member, you have 10 years from the date of your death to exhaust the funds in that account using the required minimum distributions (RMD). Non-designated beneficiaries must withdraw the entire account within five years of the death of the employee or owner of the IRA if distributions have not started before the death.
Here's what you need to know about the proposed changes to the inherited IRA rules and how to prepare if you've inherited an IRA. Also note that the following options are for individuals who are specifically listed as beneficiaries in the deceased's IRA account. If the plan document provides for distributions to be made in accordance with the five-year rule only if the original owner of the account died before the required start date, the beneficiary cannot keep the funds in the inherited account or extend the distributions throughout the life expectancy distribution method, even if he otherwise qualifies as an eligible designated beneficiary. A traditional IRA provides a tax deduction during the years when contributions are made to the account.
However, distributions from an inherited IRA are mandatory and every voluntary distribution or minimum required distribution (RMD) of the account will be subject to tax. The original owner of a Roth IRA never has to accept RMD, but those who inherit a Roth IRA do, unless they fall into one of the categories of exceptions. With an inherited IRA, you may need to make annual distributions regardless of how old you are when you open the account or you are required to fully distribute the account's assets within a specified number of years. The SECURE Act distinguishes an eligible designated beneficiary from other beneficiaries who inherit an account or IRA.
One of the important rules of hereditary IRA for beneficiaries who are not spouses is that all money in the account must be withdrawn by December 31 of the tenth year after the death of the original owner. The SECURE Act requires that the total balance of the participant's inherited IRA account be distributed or withdrawn within 10 years of the death of the original owner. Examples of non-designated beneficiaries include the estate of the account owner or someone who inherits the account but is not listed on the relevant forms as a designated beneficiary. If you receive a check, the money will generally be taxed as ordinary income and cannot be deposited in an inherited IRA that you may have at another company, nor can it be redeposited in the inherited IRA from which it was first withdrawn.
Whether a spouse or non-spouse is named the beneficiary of an Individual Retirement Account (IRA) when the owner of the IRA dies, current tax law allows the inheritance, or the entire sum of the account, to be accepted tax-free. The IRS has set a minimum amount that account holders must withdraw from an IRA and defined contribution plans (such as 401 (k) plans each year.