Traditional vs. Inherited IRA

Saving early for retirement means more money in the long run.

Saving early for retirement means more money in the long run.

There's no such thing as too much money for retirement, whether you save it or inherit it. If you've opened a traditional individual retirement account, you designated an IRA beneficiary in the case of your death. If someone names you as their traditional IRA beneficiary and you inherit all or part of their IRA, the rules all depend on your relationship to the late IRA owner.

Traditional IRA

Contributions to traditional IRAs are tax-deferred, meaning you don't pay taxes on the income until you begin taking distributions at retirement. At that time, most people are in a lower tax bracket than during their working years. If you or your spouse aren't covered by an employer-sponsored retirement plan, you can deduct your annual contributions on your federal income tax return. You might still make partial deductions depending on your income. Even if you aren't eligible for deductions, you can still contribute to a traditional IRA, no matter how much money you earn. For 2013, you can contribute a maximum of $5,500 to your IRA, as long as you earn that much in income. Once you're over 50, you can contribute an additional $1,000, for a $6,500 total.

Required Minimum Distributions

You're eligible to start taking distributions from your traditional IRA when you reach the age of 59 1/2. By the time you reach 70 1/2, you must take required minimum distributions or face a 50 percent penalty on the amount you didn't take. Even if you're still working at age 70 1/2, you can't make additional contributions to your traditional IRA. However, you can make contributions to a Roth IRA if you meet income eligibility requirements.

Spousal Inherited IRA

If you've inherited a traditional IRA, your options depend on who died and left you as a beneficiary. If it was your spouse, you can transfer the IRA into your own account or retitle the account in your name. You can continue to make IRA contributions into the account. No other inherited IRA beneficiary has that option. You then begin taking withdrawals upon reaching age 70 1/2. If you don't want to exercise that option, you can choose to receive distributions under the same rules as any other type of heir.

Other Heirs

If you're not the spouse, the inherited IRA must be retitled from the original owner's name into an inherited account. The new account title names the late owner and the beneficiaries. If more than one person inherited the account, you can ask the financial institution acting as custodian to divide the account into different named inherited IRAs. You must begin taking distributions by Dec. 31 of the year the person leaving you the IRA died. If the original owner was over 70 1/2 at the time of death and already taking distributions, you must take required minimum distributions based on your life-expectancy tables, as calculated by the Internal Revenue Service. If you don't take required distributions, you'll face that 50 percent penalty on the amount not taken. If the person who left you the IRA died before reaching 70 1/2, you're also eligible for the five-year rule. That means you can withdraw all of the inherited funds within five years of the late owner's death. If the account is emptied by that date, you aren't hit with required minimum distribution penalties.


About the Author

Jane Meggitt has been a writer for more than 20 years. In addition to reporting for a major newspaper chain, she has been published in "Horse News," "Suburban Classic," "Hoof Beats," "Equine Journal" and other publications. She has a Bachelor of Arts in English from New York University and an Associate of Arts from the American Academy of Dramatics Arts, New York City.

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