How do inherited IRAs work?

An inherited IRA, also known as a beneficiary IRA, is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. Additional contributions may not be made to an inherited IRA. Rules vary for spousal and non-spousal beneficiaries of inherited IRAs.

What is the tax rate on an inherited IRA?

If the money is withdrawn before the age of 59½, there’s a 10% tax penalty imposed by the IRS and the distribution would be taxed at the owner’s income tax rate. 1 If you inherit a traditional IRA to which both deductible and nondeductible contributions were made, part of each distribution is taxable.

How do you split an inherited IRA?

To split an inherited IRA into separate inherited IRAs:

Create a separate account for each beneficiary, titled to include both the name of the deceased owner as well as the beneficiary.
Use direct, trustee-to-trustee transfers to move the assets from the original IRA to each of the separate inherited IRA accounts.

How do I transfer an inherited IRA?

To roll over inherited IRA assets into your existing IRA, you will need:

Spousal Claim Form for IRAs (PDF).
Fidelity IRA beneficiary designation: Update your beneficiaries online or complete and mail the Fidelity IRA Beneficiary Designation Form (PDF).
Copy of the decedent’s death certificate.

Should I cash out an inherited IRA?

If you inherit a traditional IRA, you can cash out the account at any age — even before you reach age 59½ — without having to pay a 10% early-withdrawal penalty. But you will have to pay taxes on the money in the account (except for any nondeductible contributions).

Do you pay capital gains on an inherited IRA?

Withdrawals from an IRA account, whether an inherited IRA or a regular IRA, are taxed as ordinary income for the year of withdrawal. That means they do not have the benefit of being taxed at the lower capital gains tax rates (currently zero, 15 or 20 percent, depending on your tax bracket).