The rules are strict, and mistakes can be costly.
Inheriting an IRA is not like inheriting any other asset. You’ll need to be very careful to follow the rules. Usually the parent is the beneficiary and the children (grandchildren) are successor beneficiaries. Here’s how it works, as described in nj.com’s recent article, “Inheriting an inherited IRA? Your payout choices will be limited.”
Per IRS rules, if you die prior to withdrawing all the funds from an inherited IRA, then the beneficiaries are bound by the same Required Minimum Distribution (RMD) schedule that they’d chosen when they inherited it.
A person will typically choose either his own life expectancy or the life expectancy of the original plan participant, whichever’s longer. The successor beneficiaries must then keep withdrawing what’s left, according to that same schedule.
However, it’s different if you leave your own IRA to your children. In most circumstances, children who inherit an IRA would be able to withdraw the funds over their own life expectancy.
Note: this is the general rule. The IRA rules are quite complex, and there are many exceptions to the general rules. Ask the financial institution where the IRA is held, if they have any rules concerning their IRAs that may change the general rules.
With an inherited IRA, you need to take annual distributions no matter what age you are when you open the account. This doesn’t apply, if you've simply transferred another IRA to your own IRA.
Again, as a general rule, you must take distributions during your lifetime or within five years after the original account holder passed away.
If you inherit a Traditional IRA, you’ll pay taxes on any distributions you take. Rollover, SEP, and SIMPLE IRAs become Inherited Traditional IRAs. In contrast, with an Inherited Roth IRA, you don’t pay taxes on distributions.
Speak with an experienced estate planning attorney in Houston who is well-versed in the rules regarding inherited IRAs to protect your inheritance and what may one day become your children’s inheritance.
Reference: nj.com (December 20, 2018) “Inheriting an inherited IRA? Your payout choices will be limited”