In this article, we will learn about the withdrawal rules and tax consequences of inherited IRAs.
What is a Beneficiary Distribution Account for an IRA?
The Beneficiary Distribution Account for an IRA (IRA BDA) is called the “Inherited IRA”, which is the account you receive as a beneficiary from someone else. The rules governed by the U.S. tax services dictate what you can do with an inherited IRA, depending on whether you were the decedent’s spouse or otherwise.
Inherited IRA Rules under the SECURE Act
The rules for inherited IRAs changed with the passage of the SECURE Act. Most of these changes went into effect on January 1, 2020. The SECURE Act addresses many issues related to retirement, as well as matters concerning inherited IRAs. Non-spouse beneficiaries must withdraw all funds from the inherited IRA within 10 years of the account holder’s death from the date of the law’s enactment.
If the Account Holder Died Before January 1, 2020
Your options depend on whether the original account holder died before or after reaching age 70 and a half prior to the SECURE Act’s enactment.
Do You Have to Accept an Inherited IRA?
You are not obligated to accept assets from an inherited IRA. You may instead choose to liquidate the estate. The assets will then go to the next beneficiary, so you will not owe any taxes on them if liquidated. This matter should be discussed with a tax professional before you decide. There are significant tax implications in the liquidation of an inherited IRA.
Conclusion
The SECURE Act introduced significant changes in the options available to non-spouse beneficiaries regarding how and when they want to receive the inherited assets. Review your options carefully if you have been chosen by a friend or family member as the beneficiary of a traditional IRA or Roth IRA. See how these options integrate into your overall financial plan to determine the best course for you and your portfolio.
Frequently Asked Questions
How can I start an IRA BDA? You can set up an IRA BDA just like any other brokerage or retirement account. For example, if you want to start an IRA BDA at Fidelity, you would fill out the beneficiary IRA application.
What is the cost basis when I own inherited securities in an IRA BDA? IRA withdrawals will be taxed as ordinary income, so it doesn’t matter how much the profit will be before taxes on the trade. If you received a security outside of a tax-exempt account, that security will be acquired with a high cost basis, determined by its fair market value at the time of inheritance.
Source: https://www.thebalancemoney.com/beneficiary-distribution-account-bda-ira-4159896
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