Beneficiary IRA Withdrawal Rules

By M.J. Kelly

  • Overview

    An inherited IRA can be a windfall that pays dividends for years to come when you know how to treat the proceeds. As a beneficiary, you have choices to make regarding how you withdraw your inheritance. Look at the pros and cons of taking either a lump sum payment or stretching out your withdrawals. The guidelines here describe rules you can follow to make the most of an inherited IRA.
  • Function

    When you take possession of an inherited IRA, it often makes financial sense to transfer the funds into a beneficiary IRA to avoid paying immediate income taxes on the proceeds. The money in the IRA will maintain its tax deferred status until you start withdrawing the funds. The primary beneficiary of an IRA may disclaim the proceeds, in which case the funds are distributed to a contingent heir or heirs. Multiple beneficiaries may open separate inherited beneficiary IRA accounts.
  • Identification

    If you were married to the deceased at the time of his death, you are permitted to transfer funds from an inherited IRA to your existing IRA and treat is as your own. You may also accept the proceeds from a traditional IRA in a single lump and pay ordinary income tax on the withdrawal. A non-spouse beneficiary may not move an inherited IRA into his own IRA. He must set up a beneficiary IRA or take the inheritance as a lump sum.

  • Time Frame

    When you set up a beneficiary IRA, you'll need to decide whether to take withdrawals during the next five years or for the duration of your lifetime. Since assets in an IRA accumulate tax deferred until they are withdrawn, depending on your tax bracket and your age, it may be wise to let your inherited funds grow until you are required to take distributions.
  • Considerations

    If the original account holder died before the age of 70 1/2 year old, a spousal beneficiary who decides to take distributions over her lifetime must start making withdrawals by December 31 of the year the deceased would have turned 70 1/2. If no beneficiary is named on an IRA, the account may go to the estate of the deceased , which may limit the financial options of survivors.
  • Features

    An inherited Roth IRA may be distributed in a lump sum, over a five year time frame or over the lifespan of the recipient. Since Roth IRAs are funded with after tax dollars, qualified withdrawals will be tax free. A spouse may transfer a Roth into her own IRA only if she is the sole beneficiary. IRA heirs may name new beneficiaries on their inherited IRAs.
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