What Happens to Dad's IRA If He Dies?
A person who owns an Individual Retirement Account pays no income tax on the money he deposits into the IRA or on any interest the money earns. The tax comes due when he withdraws money--which, if he's retired, may mean he's earning less and in a lower tax bracket. If your father owns an IRA at the time of his death, a different set of IRS rules come into play.
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Identification
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When your father set up an IRA, he had to identify a beneficiary who would receive the assets in the account should he die. The IRS says the beneficiary can be anyone--a child, a parent, a spouse or an organization. Your father can also name multiple beneficiaries, and can change those beneficiaries at any time. Because the distribution of the IRA assets isn't based on the owner's will, the contents of an IRA don't go through probate.
Significance
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The choice of beneficiary affects what happens to the IRA after the owner dies. Under IRS rules, if your father's spouse is the beneficiary, she has the option to roll it over into her own IRA, as well as some other retirement accounts, such as a 403(a). A spouse is the only beneficiary who can choose that option.
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Time Frame
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If someone other than your father's spouse inherits his IRA--or if his spouse doesn't roll over the account--the recipient must begin making withdrawals. The general formula is that the beneficiary must divide the total value of the account by his life expectancy, as measured by the IRS tables found online in Publication 590. For example, if your father's spouse has 25 years to live and the IRA is worth $250,000, the IRS formula would call for her to withdraw 4 percent a year, equal to $10,000. A beneficiary can withdraw more than the minimum, but would still have to take out the minimum the following year.
Considerations
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If the IRA names multiple individual beneficiaries, the IRS states, the shortest life expectancy among them will be used to figure out the minimum withdrawal amount. If the IRA is divided into separate shares or accounts for each beneficiary, however, then the minimum distribution will, in most cases, be figured for each account holder separately.
Alternatives
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Your father (and any account owner) can name his estate as the IRA beneficiary, the Nolo legal website states, so that it's distributed along the lines set out in his will. However, this makes it subject to probate, and possibly to claims from creditors on the estate.
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