An IRA is one of the most important financial investments you will make in your life. When you first open an IRA, part of the paperwork that comes with it is to name at lest one primary beneficiary to your account. Sometimes, you may even name some secondary names as well. This process is important because if anything were to happen to you, then the money in the account would be passed down to the beneficiaries. For the beneficiaries of the account, this process can be somewhat confusing. It is important to know what the rules are for having an inherited IRA because if you do not do everything correctly, the money in the account can be taxed heavily.
There are two types of people who can inherit an IRA. The first type of person who can inherit an IRA is the spouse of the account holder, so the wife or husband. One of the first things you can do if you are a spouse who has inherited an IRA is to take out all of the money at once, which is known as a lump-sum distribution. If you do take the money out all at once, you will have to report it on the taxes for that year. There will most likely be a 20% withholding for taxes when the money is taken out. This means that you cannot get the 20% back when you file for taxes. When taking out the money as a lump sum, is not subject to the 10% early withdrawal penalty, which most IRAs do have.
The next option that a spouse has when inheriting an IRA is to open an inherited IRA. The account will remain in the deceased person’s name for the benefit of their spouse. The money in the account will grow tax-deferred until the money is taken out of the account. This means that the money will not be taxed until it is withdrawn from the account. The funds from this account can be accessed at any time that the account is open, unlike other IRAs, where you have to wait until you are 50 and 1/2.
The last option that comes along with a spouse inheriting an IRA is to open an account in their own name. You can transfer the assets out of their account into your own IRA, but this comes along with penalties. You will have to follow all the rules that come along with typical IRA withdrawal schedules.
When you are a non-spouse or a child who inherited an IRA, you only have two options. You cannot roll the money into an account that is your own. You can set up an inherited IRA, and watch the funds grow, tax deferred. This means that the account will remain in the original account holder’s name for your benefit. If the account holder passed away before the age of 70 and 1/2, you have to take the required minimum distribution out either by the end of that year, the end of the year in which the account holder would have turned 70 and 1/2, or at the end of the year of the original account holder’s death, whichever is the latest. Non-spouses also can empty the account by taking out the lump sum. You will have to pay the taxes that come along with this. If there is more than one beneficiary on the account, you can request to split the account evenly.
Inheriting an IRA can be tough because it may mean that there has been a loss in the family. The original account holder has spent a lot of time saving their money, so it is important to make sure those funds are safe when the funds are given to you. Follow all of the rules, and make sure that whatever option you choose is the best for you.