The Difference Between Inheriting an IRA vs. Assuming an IRA

by Michael Keenan
Assuming an IRA allows you to treat the account as your own.

Assuming an IRA allows you to treat the account as your own.

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Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. If someone dies with money remaining in an IRA, the account goes to the person the decedent names as the beneficiary of the account. Depending on your relationship with the decedent, you may have the option of assuming the IRA rather than treating it as an inherited IRA.

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Inheriting an IRA

When you inherit an IRA, you must take required minimum distributions from the account. You can satisfy this requirement by withdrawing all of the money from the IRA by the end of the fifth year following the year of death. If the death and subsequent inheritance occurs in 2013, for example, you have until December 31, 2018 to withdraw the money from the account. Alternatively, you can take required minimum distributions each year over your life expectancy until the account is empty.

Assuming an IRA

Assuming an IRA means opting to treat the IRA as if it was your own account. Only spouses of the decedent are allowed to make this election, so if you weren't married to the decedent, you cannot assume the IRA. The advantage to assuming an IRA is that you don't have to take the minimum distributions required for those who inherit IRAs. However, you still must take any minimum distributions that would be required based on your own age.

Transferring IRA Funds

When you inherit an IRA, you cannot combine the inherited IRA with any IRAs in your own name. In fact, the only way you can move inherited IRA funds is through a direct transfer of the funds from the inherited account into another account clearly titled as a beneficiary IRA. Additionally, you cannot roll over any distributions. If you assume an IRA, however, the funds are treated no differently than funds in your other IRAs, so you are free to consolidate them into just one account.

Early Withdrawal Penalties

Generally, if you withdraw money from an IRA before you turn 59 1/2 years old, you must pay a 10 percent additional tax, on top of any regular income taxes you owe. If you take a distribution as a beneficiary, the extra tax does not apply because beneficiary distributions are tax exempt. If you elect to assume the IRA, however, you are no longer a beneficiary of the account, so you will not be able to use the exemption for early withdrawal.