IRA Beneficiary Information
The rules and regulations associate with Individual Retirement Accounts can be complicated, and this is even more so for inherited IRA accounts. While inherited IRA accounts maintain many of the same tax advantages and characteristics of traditional IRAs, there are additional regulations regarding the handling of inherited IRA accounts. Additionally, account ownership and distribution rules differ depending on whether the beneficiary of an IRA is a spouse or a non-spouse.
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Beneficiary Definition
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A beneficiary is someone who has been named to receive certain benefits. Upon the death of an IRA account holder, the beneficiary is the person designated to receive the IRA assets. Usually, at least two beneficiaries are designated for IRA accounts, a primary and a contingent beneficiary. The contingent beneficiary inherits the account in the event that the primary beneficiary dies first or otherwise disclaims their right to the IRA assets. If multiple beneficiaries are named, the account owner can designate the percentage ownership that each beneficiary will receive.
Rule of Law
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Beneficiary designations on IRA accounts superseded any other instructions that a decedent may leave, such as in a will or trust. In terms of estate law, IRA accounts pass "outside of the estate" and follow the beneficiary designations specifically attached to the account. If no beneficiaries are named, then the IRA assets transfer in accordance with the rest of the estate, but most financial service firms require a named beneficiary before they will open an IRA account. In community property states, a spouse must sign a disclaimer if he is not named the primary beneficiary of the account.
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Spousal Beneficiaries
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Spousal beneficiaries of IRA accounts receive special privileges not available to other beneficiaries. Specifically, a spouse can treat an inherited IRA as if it is his own, meaning he can re-title the account into his name, make contributions, take distributions and transfer the account, subject to the usual IRS restrictions regarding IRAs. Mandatory distributions are not required until the beneficiary reaches the age of 70 1/2, as with all IRAs.
Non-Spousal Beneficiaries
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Non-spousal beneficiaries are not allowed to treat inherited IRAs as their own, and must begin taking distributions from the account immediately. Non-spousal beneficiaries cannot contribute to inherited IRAs, nor transfer them into their own personal IRAs. The amount of the required distributions depends on whether or not the decedent had already begun taking their own required minimum distribution. If so, the beneficiary can continue taking distributions according to the decedent's life expectancy, or he can take distributions based on his own life expectancy as determined by IRS Table 1. If the owner died before the required beginning date, the beneficiary can take distributions based on his own life expectancy.
Tax Consequences
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The act of inheriting an IRA is not a taxable event. However, distributions taken from any IRA, including inherited IRAs, are subject to ordinary income tax. Additionally, if a spouse chooses to treat an inherited IRA as his own, then any distributions taken before the age of 59 1/2 are assessed a 10 percent early withdrawal penalty. This penalty is waived for non-spousal beneficiaries under the age of 59 1/2.
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