IRA Beneficiary Account Rules

By M.J. Kelly

  • Overview

    IRA Beneficiary Account Rules
    When you inherit an IRA, you must decide how you want to receive the proceeds. The method you choose will depend on whether you are the spouse of the decedent, the age of the decedent at death and whether you inherit a traditional or a Roth IRA. Learn the rules of inheriting an IRA in order to substantially reduce your tax liability.
  • Identification

    In order to defer paying income tax on an inherited traditional IRA, transfer the proceeds into an inherited beneficiary IRA account. Instead of paying ordinary income tax on the inheritance, the money is tax-sheltered until you begin to take withdrawals.
  • Features

    You are eligible to open a beneficiary inheritance IRA account whether you are the spouse or the nonspouse of the decedent. If you are a spouse, you have the choice of transferring an inherited IRA directly into your own IRA or opening a beneficiary inheritance IRA. Nonspouses may not put the proceeds of an inherited IRA into their own IRAs. They must open a beneficiary inheritance account.

  • Types

    A spouse who opens a beneficiary inheritance IRA, with the proceeds from a decedent who was under 70½ years old, may choose to take the proceeds over a five-year term or over the course of her lifetime. If she chooses the five-year term, she must withdraw all of the proceeds within five years. If she chooses the lifetime term, she must start taking payments by December 31 of the year in which the decedent would have turned 70½.
  • Function

    If the decedent died after age 70½, a spouse beneficiary does not have the option of taking withdrawals over a five-year period. She must begin to withdraw funds from an inherited beneficiary IRA account according to the minimum distribution rules based on her life expectancy.
  • Considerations

    Either a spouse or a nonspouse may inherit a ROTH IRA and transfer the proceeds into an inherited beneficiary IRA. If the five-year withdrawal period is selected, the assets of the ROTH IRA will grow tax free until the end of the five-year period. When the life-expectancy term for withdrawal is chosen, the assets may grow tax free indefinitely. The beneficiaries of either a traditional or a ROTH IRA, who transfer the proceeds into a beneficiary inheritance IRA account, may name their own IRA beneficiaries.
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