Rocket Dollar Knowledge Base

Can I rollover and use an Inherited IRA for a Rocket Dollar account?

Yes, but you have to be careful to manage your required minimum distributions along with your investment.

I have an inherited IRA. How exactly do they work?

Inherited IRAs are received when a loved one passes away. You open a traditional IRA, but must be reported differently. They generally must be distributed under the same timeline as the person who originally started them, through yearly (RMDs) required minimum distributions. If you do not use the life expectancy method, you must explore the other options described below.

Remember distributions can happen after 59 1/2 and RMDs start at 70 and 1/2. That applies to the previous owners age. RMDs for inherited IRAs should be taken by 12/31 of that year.

You can read more about RMDs and calculating here.

What are my options if I don't want to slowly distribute the IRA for RMDs using the life expectancy method?

  1. Spousal transfer. If you are the spouse and sole beneficiary, you can open a new account to treat the IRA as your own. You will pay a penalty to early distribute before 59 and 1/2 like you would with any other of your own IRAs. If you are 10 years younger than your spouse, you will have to use a different calculation table for an inherited IRA spousal transfer.
  2. Lump Sum Distribution - You can distribute the entire IRA at one time, and pay taxes on it. There are no early withdrawal penalties. You can start a new IRA or 401(k) with Rocket Dollar after if you wish, but remember you will be building up contributions from scratch at a $0 balance.
  3. 5-year method - You can open an IRA, and have the assets distribute over 5 years to lighten the tax burden. On the 5th year, all assets should be distributed. The 5-year method cannot be used if the original IRA owner was over age 70 1/2.

How can I manage an investment if I'm required to distribute money in RMDs each year?

You must make sure that any RMDs are not going to interfere with your investment you plan to make. If you have to distribute more than your investment is worth, you could be forced to sell assets prematurely.