A traditional Individual Retirement Account (IRA) is a tax-advantaged savings account that is established and funded by an individual to accumulate retirement savings. A traditional IRA is generally funded through tax-deductible annual contributions and rollovers of pre-tax assets from other eligible retirement plans, such as 401(k) plans.

A traditional IRA is easy to establish and provides the account owner with flexibility and control over their contributions, investments, and distributions. Annual retirement savings contributions may be tax- deductible and investment earnings generally grow tax-deferred.

Anyone who has earned income can establish and contribute to a traditional IRA. Earned income is compensation you receive from working that includes wages, commissions, and self-employment income. You can have a traditional IRA even if you have a retirement plan with your current employer.

To establish a traditional IRA, you must sign an IRA plan agreement with an IRA custodian. Banks, life insurance companies, mutual fund companies, brokerage firms and other financial institutions can act as an IRA custodian. The IRA custodian will provide you with a copy of the plan agreement and a disclosure statement that explains the traditional IRA rules.

You can establish a traditional IRA at any time. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the IRA and make the contribution.

You can make an annual contribution of up to $6,000 (for 2020) or 100% of compensation, whichever is less. If you are age 50 or older, you may make an additional catch-up contribution of $1,000. The annual contribution limit applies to all of your traditional and Roth IRAs in aggregate.

You are not required to make a traditional IRA contribution each year and you can vary the amount you choose to contribute each year.

If neither you nor your spouse is covered by an employer-sponsored retirement plan, your entire contribution is tax-deductible. If either you or your spouse is covered by an employer-sponsored retirement plan, your deduction may be limited depending on your level of income.  

You can transfer or rollover traditional IRA assets into another traditional IRA. Additionally, if you are eligible to take a distribution from your employer’s retirement plan, those assets can generally be rolled over into your traditional IRA. Assets that are rolled over or transferred will not be included in your taxable income.

You can take distributions from your IRA at any time. The distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½.

You must begin taking a minimum payment from your traditional IRA each year starting with the year you attain age 72 (age 70½ if born before 7/1/1949). You have until April 1 of the year following the year you attained the required beginning age to take your first distribution.  You must continue taking distributions by December 31 each year thereafter. Your beneficiaries will be required to continue taking distributions after your death.

1. Understand your options – When you inherit an IRA following the IRA owner’s death, federal tax laws require that you distribute the account balance within a certain time frame. The laws provide a few payment options. The financial institution where the IRA is located (IRA custodian) may have more restrictive policies than what is permitted under federal law, so you will want to contact the IRA custodian to confirm your options. Depending on the dollar amount and types of investments in the IRA, you may also want to seek the advice of a financial advisor or tax professional before you make any decisions
 
2. Provide a death certificate – Before you can withdraw money from the IRA, you or the personal representative of the IRA owner’s estate will need to provide a certified death certificate to the IRA custodian.
 
3. Meet the deadline – Under the tax laws, you have until December 31 of the year following the year the IRA owner died to take your first payment or provide instructions regarding how you want to take payments from the IRA. The IRA custodian may impose other deadlines.

You can always take payments more rapidly, but the tax laws are designed to ensure that the longest schedule for payouts of retirement savings is over either the owner’s life expectancy or the beneficiary’s life expectancy. Spreading payments over multiple years can reduce the tax impact of these distributions and allow the assets to grow tax-deferred for as long as possible. If you decide to leave the money in the inherited IRA long-term, you must take out a minimum amount each year. How long you have to deplete the account depends on three variables: whether you are a spouse or non-spouse beneficiary, your age, and the age the IRA owner.

For spouse beneficiaries:
• 5-year rule (in certain cases)
• Life expectancy payments
• Treat IRA as own
 
For non-spouse beneficiaries
• 5-year rule
• Life expectancy payments

Taking payments under the five-year rule is available to both spouse and non-spouse beneficiaries if the IRA owner died before April 1 of the year after the year he or she turned age 70½. This April 1 date is known as the required beginning date (RBD). Under this payment option, you can withdraw any amount you choose each year, or none, as long as you deplete the IRA by the end of the year containing the fifth anniversary of the IRA owner’s death.
 
The five-year payment option is not available if the traditional IRA owner lived past his or her required beginning date. 
 
Example: Assume your Aunt Sally died on July 1, 2017, at the age of 68, and named you as the beneficiary of her IRA. If you elect the five-year rule payment option, you may take distributions at any point during the five years following Sally’s death as long as you deplete the IRA by December 31, 2022 – the year containing the fifth anniversary of Sally’s death.

Life expectancy payments are available to both spouse and non-spouse beneficiaries regardless of the IRA owner’s age at death. Under the life expectancy payment option, you must withdraw a minimum amount each year. (You can always withdraw more if you want.) These payments must begin by December 31 of the year following the year the IRA owner died. A payment is due by December 31 every year until the IRA is depleted.

The minimum amount you must distribute is calculated by dividing the prior-year December 31 IRA balance by a life expectancy factor specified in the IRS’s Single Life Expectancy Table. The person whose life expectancy is used to calculate the payments depends on the IRA owner’s age at death, your age, and whether you were a spouse of the IRA owner.
 
Death Before RBD
• Spouse beneficiary: your life expectancy, recalculated each year 
• Non-spouse beneficiary: your life expectancy, non-recalculated 
Death After RBD

• Spouse beneficiary: whoever is younger - you or the IRA owner 
• Non-spouse beneficiary: whoever is younger - you or the IRA owner
Example: Assume your Aunt Sally died on July 1, 2017, at age 68, and named you as the beneficiary of her IRA. Her IRA balance as of December 31, 2017 is $100,000. You would use the life expectancy for your age in 2018 (the year after death) to calculate the first payment. If you’re age 45 in 2018, the life expectancy factor would be 38.8. The payment would be $2,577.32 ($100,000/38.8). For the next year’s calculation, you would subtract one from the previous year’s life expectancy (38.8-1 = 37.8) and so on for each subsequent year’s calculation (i.e., nonrecalculated).
 
If you are a spouse beneficiary, you have two extra options:
• You could wait until he or she would have turned 70½ before you start taking annual payments.
• For each year’s payment, you use your actual age to determine the life expectancy factor, rather than reducing the first year’s factor by one. This method results in a slightly smaller required payment than a non-spouse beneficiary calculation.

If there are multiple beneficiaries named for the IRA, each beneficiary may calculate life expectancy payments based on their own life expectancy if each beneficiary’s share is separately accounted for by the IRA custodian. The separate accounting must be set up by December 31 of the year following the year the IRA owner died. If this deadline is not met, the minimum annual payments may have to be calculated based on the oldest beneficiary’s life expectancy.
 
Depending on the IRA custodian’s policies, it may set up a separate account for each beneficiary on its operating system or request that each beneficiary sign IRA documents to establish an inherited IRA.
 
Each beneficiary must withdraw their share of the required amount each year.

You are responsible for ensuring that you take at least the minimum required amount from your inherited IRA each year. If you choose to take life expectancy payments, you will need to calculate your minimum amount. The Single Life Expectancy Table and instructions for calculating payments can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):

 
https://www.irs.gov/publications/p590b#en_US_2017_publink1000230812

The IRA custodian may allow you to take over the existing IRA. Some IRA custodians will require you to sign documents to establish a traditional IRA in your name. You may also transfer the assets to your own IRA if you already have one.

If you choose to treat your spouse’s IRA as your own IRA, you can make contributions and take distributions at any time and will not be required to take distributions until you are 70½.
 
One thing to consider if you treat inherited IRA assets as your own is that you will pay a 10% early distribution tax, in addition to income tax, on amounts you withdraw from your IRA before reaching age 59½. This 10% tax does not apply to distributions from an inherited IRA. So, if you maintain an inherited IRA until you reach age 59½ and then treat the IRA as your own, the inherited assets will never be subject to the 10% early distribution tax.

You generally must include any payments you take from an inherited traditional IRA in your taxable income for the year. If the IRA owner made any nondeductible contributions to the IRA, however, a portion of each payment may be tax-free. A worksheet to calculate the amount that can be excluded from tax can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
 
https://www.irs.gov/publications/p590b#en_US_2017_publink1000230812