Rules for the Beneficiary of Inherited Traditional IRA Accounts

The rules for individual beneficiary's to assume an IRA account are straightforward. Failure to observe mandatory redemption requirements can cause penalty and interest fines. Investors are urged to consult tax professionals for interpretation of specific details and documents required by the IRS. Note the additional considerations for spousal inheritances.

The General Rule for Beneficial IRA Assumption

There is a clear distinction between a beneficiary trust left to a spouse and a trust left to a non-spouse. As described below, a spouse has several options. The beneficial non-spouse must enter into a distribution period beginning the year after the inheritance. The beneficiary cannot add the proceeds to her own IRA account nor can she delay the withdrawal of funds until the mandatory withdrawal age of 701/2. IRS Publication 590 Table 1 details the formula for withdrawal, which is based on age of the beneficiary.

Spousal Assumption of an IRA

A spouse who assumes the IRA of a deceased partner has two choices. He can choose to follow the beneficiary assumption rule, or he can chose to manage funds as if the IRA were his own. Thus, a spouse aged 40 could opt to receive funds over the next several years or let the proceeds accrue as if the IRA account had always been in his name. This means no withdrawals before 59 1/2 and mandatory withdrawals beginning at 70 1/2. The account should be retitled under the name of the original spouse and the surviving spouse.

Disallowing an Inheritance

A beneficiary of an inherited IRA account may choose not to accept the IRA account in order to pass the proceeds to another party. The chosen beneficiary simply writes and signs a letter to not claim the IRA. The benefits then fall to the estate of the deceased or the secondary beneficiary. The benefits are then disbursed according to the terms of the will or by the laws of the state.

Futher Considerations of a Spousal Inheritance

Spouses who inherit an IRA should make plans to immediately name a new beneficiary in case they die before the proceeds are distributed. Since no new monies can be added to the account, the monies should be kept separate from the existing accounts of the surviving spouse.

Miscellaneous Considerations

Withdrawals made under Section 590 of the IRS code are taxable events as proscribed by Table 1 beginning no later than December 31 of the year after the death of the owner of the IRA account. If the account is large, tax planning may be necessary. Note that trusts cannot be the beneficiaries of an inherited IRA account. The trustee can provide documentation so any beneficiary, including a spouse, can be named without funds entering the trust. Non-spouses, charities, estates and other organizations who inherit IRAs cannot become the owner of the IRA, and the account must be liquidated in 5 years.

References

• IRS Rules for IRA Accounts

Resources

• Essortment: Spousal Assumption of an IRA