- The IRS has set up new rules on how to take possession of an inherited IRA from a decedent. The recipient should be able to enjoy an investment that is tax deferred, making it more valuable in the future. Nevertheless, the rules may be problematic for many since their explanations are very long and rather vague.
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Inheriting an IRA from a spouse brings the following choices:
1. The spouse can choose to simply roll it into his own IRA account, and continue contributions each year. He can set up a new IRA, and roll the inherited one into it.
2. He can choose to transfer the inheritance to a beneficiary distribution account. The name of the deceased and the recipient's name stay on the account. (Be certain that the bank does not just use your name only when setting up this account as this would render the entire account taxable in a year.) This strategy is helpful if the surviving spouse is younger than age 59.5, and wishes to withdraw funds from the IRA without the cost of a penalty.
3. He can cash it out; however, talking with a tax specialist first is best because this could create hefty penalties.
4. He can choose to give the IRA to someone else (like a child). - If a child inherits an IRA from, the new owner cannot add to or increase the funds. She cannot combine the account with any existing IRA account that she may have. It must be treated as a separate account entirely. All she can do is hold it as an asset until the age of 70.5, when distributions can begin (subject to certain exceptions).
- If an IRA is to be inherited, it is best that it be set up as a designated beneficiary, instead of stating "my estate." The person who is to benefit should be spelled out. The beneficiary form is available at the bank that holds the IRA, and this information can be put on the form. Do not leave the form blank, and do not just assume that the account will automatically go to people mentioned in your will.
- The spouse is the only person who can inherit an IRA account and integrate other IRA funds with it. If you are aware that you will be inheriting an IRA account from a spouse, parent, aunt or other relative, it is best to discuss the details with your tax adviser, and with the current owner while they are living if possible, so that the best strategy for the account can be planned.
