Inherited Accounts Guide

What is an Inherited IRA?

An inherited IRA is a retirement account, like a Traditional or Roth IRA, that someone receives after the original owner's passing. Beneficiaries can be individuals (spouses, non-spouses like adult children or relatives, and even non-related individuals) or non-person entities like trusts, estates, or charities. 

What are the rules for spouse beneficiaries?

Spouses have more flexibility and can generally treat the inherited IRA as their own, potentially rolling it into an existing IRA or opening a new one. Distributions can often be deferred until the inheritor reaches their own Required Minimum Distribution (RMD) age.

Are there differences between Inherited Non-Qualified Annuities and Inherited IRAs?

Yes, if you are the beneficiary of a non-qualified annuity, your options are more limited than they are as a beneficiary of an Inherited IRA. However, there are still a variety of options available to you depending on when you inherit the non-qualified annuity and your relationship with the annuity owner.

What are Inherited/Stretch IRAs?

Before the SECURE Act of 2019, a “Stretch IRA” (also known as an Inherited IRA) allowed a non-spouse beneficiary to stretch out distributions from an Inherited IRA over their own life expectancy. For IRA owners inheriting an IRA after December 31, 2019, the "stretch" provision was eliminated for most designated beneficiaries. Most designated beneficiaries are now required to deplete the inherited IRA within 10 years following the IRA owner’s death. Exceptions include “Eligible Designated Beneficiaries,” as defined by the IRS, who are exempt from the 10-year rule and may still be able to stretch distributions over their life expectancy or other periods.

Eligible Designated Beneficiaries (EDBs): EDBs can "stretch" withdrawals over a longer period, often their own life expectancy. The Secure Act defines EDBs as:    

  • Spouse of the deceased IRA owner.

  • Disabled or chronically ill individuals.

  • Individuals who are not more than 10 years younger than the deceased IRA owner.

  • Minor children of the IRA owner until they reach the age of 21 (after which they are subject to the 10-year rule). 

What is the 5-Year Rule for Inherited Non-Qualified Annuities?

The 5-year rule for inherited non-qualified annuities occurs when the owner dies and a non-spouse individual beneficiary inherits the annuity.

The 5-year rule requires the entire inherited balance be distributed by the end of the fifth year following the year of the original account owner's death. The IRS has clarified that the year of death does not count when calculating the 5-year period. For example, if a non-qualified annuity owner dies in 2025, the beneficiary would have until December 31, 2030, to withdraw all funds.

  • The duration of the product purchased before retitling must not exceed 5 years from the date of death provided the client has not started taking withdrawals

  • If the original contract owner had already started taking withdrawals prior to the retitling of the contract, and payments were structured to be paid out for a fixed period (period certain), the beneficiary may continue to receive payments for the remainder of that fixed period.    

  • The contract does not allow for withdrawals in the first year.

  • Once withdrawals become allowable in year 2 and beyond, you may be subject to surrender fees if you make a withdrawal.

  • In certain circumstances, the non-spouse beneficiary may also be allowed to stretch the payments out over a period not exceeding their life expectancy.

What is the 10-Year Rule for Inherited Non- Qualified Annuities?

The 10- year rule for inherited IRAs is triggered when the owner dies and a non-EDB individual beneficiary inherits the IRA.

  • The 10-year rule requires the entire inherited balance be distributed by the end of the tenth year following the year of the original account owner's death. The IRS has clarified that the year of death does not count when calculating the 10-year period. For example, if an IRA owner dies in 2025, the beneficiary would have until December 31, 2036, to withdraw all funds.

  • The duration of the product purchased before retitling must not exceed 10 years from the date of death provided the client has not started taking withdrawals

  • If the contract owner had already started taking withdrawals prior to the retitling of the contract, and payments were structured to be paid out for a fixed period (period certain), the beneficiary may continue to receive payments for the remainder of that fixed period.

  • The contract does not allow for withdrawals in the first year.

  • Once withdrawals become allowable in year 2 and beyond, you may be subject to surrender fees if you make a withdrawal.

Does Axonic Insurance allow Inherited/Stretch IRAs?

Yes, we currently offer the following options for qualified and non-qualified IRA plans.

INHERITED/STRETCH IRA’s - MYGA & FIA PRODUCTS

  • MYGA

    Spousal Transfer: Allowable

    Non-Spousal Transfer: If they are currently receiving a distribution annually from the account, they must take the current year required distribution from the existing account before the transfer. 

    FIA

    Spousal Transfer: Allowable

    Non-Spousal Transfer: We do not allow this kind of ownership. No exceptions.

  • MYGA

    Spousal Transfer: Allowable

    Non-Spousal Transfer: They have not yet started taking a withdrawal from the originating account and will not be requesting a withdrawal in year 1 of the contract.

    FIA

    Spousal Transfer: Allowable

    Non-Spousal Transfer: We do not allow this kind of ownership. No exceptions.

Why don’t we allow Qualified and/or Non-Qualified Inherited IRAs for Fixed Index Annuity products for non-spouses?

Fixed indexed annuities are considered more complex than traditional fixed annuities. Axonic takes the position of reviewing suitability on spousal inherited IRA FIA purchases exactly as it would review suitability for a traditional IRA, while taking the position that a non-spousal beneficiary who has not changed the titling of the account they inherited – niece, nephew, brother, etc.- may not be as aware of risks and benefits in more complex products.  

Can an inherited IRA be rolled over into a personal IRA?

Only spouse beneficiaries can roll an inherited IRA into their own. Non-spouse beneficiaries must open separate inherited IRA accounts. 

When do I need to start taking distributions (RMDs) from an inherited IRA?

The timing of RMDs varies: 

  1. EDBs: Distributions can be spread out over their life expectancy, starting by December 31 of the year following the original owner's death.

  2. Non-Eligible Designated Beneficiaries (under the 10-year rule):

    • If the owner died before reaching RMD age, no annual RMDs are required, but the entire balance must be withdrawn by the 10th year following the death.

    • If the owner died after reaching RMD age, annual RMDs based on the beneficiary's life expectancy are needed for years 1-9, with the remaining balance distributed by the end of the 10th year.

Do I have to pay taxes on an inherited IRA or inherited non-qualified annuity?

Distributions from an inherited Traditional IRA are typically taxed as ordinary income. Inherited Roth IRA distributions are usually tax-free if they meet qualified distribution requirements, such as the account being open for at least five years.  For non-qualified annuities, there is no tax on the original principal, but any earnings or growth are taxed as ordinary income.

The information provided by Axonic Insurance is intended for general knowledge and educational purposes only. Individuals should consult with a financial professional for personalized advice regarding their specific situations and tax implications.