QUESTION:
I have an IRA account with Fidelity that I inherited from my mother? That only has $29,000 and it and I would like to use it to start an online video editing business with. I would like to use this money in the IRA to help me get started.
ANSWER:
Good question. Unfortunately, the IRA rules do not allow for the transfer/rollover of an IRA that was inherited from a non-spouse to a 401k plan including the ROBS 401k. Instead, and beginning in tax year 2020 the following rules apply to IRAs inherited from a non-spouse:
- Yes the SECURE Act changed the distribution rules for IRAs inherited by non-spouse beneficiaries starting in 2020. Other than those non-spouse beneficiaries who are disabled or chronically ill, most beneficiaries will be required to empty out the inherited IRA within 10 years (known as the 10 year rule).
- This means the inherited IRA will need to be fully distributed by December 31st of the tenth year following the IRA owner’s year of death.
- The non-spouse beneficiary is not required to take distributions over the 10 year period and can wait until the end of the tenth year to take the full required distribution.
- If the beneficiary is a minor, they will be able to wait until they reach the age of majority under state law or finish school (no later than age 26) before the 10 year rule commences.
- However, the 10 year rule will still apply to grandchildren unless they are disabled or chronically ill.
- The 10 year rule also applies to Roth IRAs.
- A 50% tax penalty applies to those non-spouse beneficiaries who do not fully distribute the inherited IRA by the end of the 10 year period.
- Spouse beneficiaries are not subject to this new 10 year rule, and can distribute the IRA over their lifetime.
COMPLIANCE NOTE: It’s important to note that the new 10 year rule for non-eligible designated beneficiaries under the Setting Every Community Up for Retirement Enhancement (SECURE) Act is not affected by this CARES Act provision. The 10-year period applies only to certain beneficiaries for deaths in 2020 and later years. If an IRA owner dies in 2020, the 10-year period would not start until 2021, the year after the year of the IRA owner’s death.
