Inherited IRAs have different rules for spouses and non-spouses. Spouses can roll over the IRA and make contributions, while non-spouses cannot transfer or contribute to the IRA. Tax benefits are available, but proper management is necessary. Beneficiaries can choose between two distribution methods, and it is important to clarify intentions in wills and with financial institutions.
An inherited individual retirement account (IRA) is a retirement account that someone inherits after the account owner dies. Inheritance rules are different for spouses and non-spouses. IRA holders who want to add clauses to their will about how their retirement accounts should be handled in the event of death can talk to both the intended beneficiaries and financial planners. Paperwork with a financial institution may also need to be completed to provide IRA beneficiary information.
When a spouse inherits an IRA, he or she has the option to roll the IRA over to existing accounts and transfer it to their name. It is also possible to make contributions to the inherited IRA. If the original account holder had started receiving payments after retirement, these payments would be redirected to the beneficiary.
Non-spouses can also inherit IRAs. Individuals can choose to leave an inherited IRA to children, parents, or other beneficiaries. In this case, the beneficiary cannot transfer or contribute to the IRA, and cannot transfer it to her name. The beneficiary has the option to distribute all funds in the inherited IRA within five years of the original account holder’s death, or to receive regular benefit checks based on expectation of duration.
There are tax benefits available with IRAs, but the accounts must be managed properly for individuals to access those benefits. People can consult tax attorneys or financial planners for information on how to access tax benefits and how to avoid problems with an inherited IRA. In general, people do not need to pay taxes on the funds until they are distributed, and they do not pay an early distribution penalty if they are under retirement age when they start receiving payments, unless they violate the rules. Violations will result in increased tax liability and can also cause considerable paperwork.
Financial institutions allow people to designate beneficiaries on their accounts, including IRAs. Depending on how an inherited IRA is structured, the beneficiary may be allowed to choose between the two distribution methods, or one method may be automatically activated upon death. To avoid confusion, people who have named beneficiaries on their bank accounts usually also discuss the disposition of these accounts in their wills to clarify their intent. If a change is necessary, it is important to confirm that the information in the bank and in the will has changed.
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