Inherited IRA's
An inherited Individual Retirement Account, also known as a beneficiary IRA, is designed to allow for the opportunity for ongoing tax-deferred growth for the IRA owner's beneficiary. Inheriting a traditional IRA could also mean unexpected penalties and taxes if you fail to correctly follow Internal Revenue Service guidelines. An inherited IRA could potentially be one of the largest assets you could ever receive from a loved one who has died.
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Required Minimum Distributions
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A traditional IRA account allows the owner to make tax deductible contributions up to a certain amount each year and the IRS requires IRA owners to begin receiving income in the form of Required Minimum Distributions by age 70 1/2. The RMDs are calculated based on the IRA owner's life expectancy.
Spousal Beneficiary
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If you inherit a beneficiary IRA from your deceased spouse, you have the option to simply take ownership of the IRA outright, and continue to make tax-deferred contributions until you reach age 70 1/2. Another option is to roll the inherited IRA over into your own new or existing traditional IRA account with no penalties, and adjust the schedule of RMDs based on your age and life expectancy. An alternative is to pass all or part of the IRA assets along to the next-in-line eligible beneficiaries within nine months of your spouse's death.
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Non-Spousal Beneficiary
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As a non-spousal beneficiary of an inherited IRA, you cannot roll the IRA over into your own new or existing IRA account, nor may you contribute additional funds to the inherited IRA. Non-spousal beneficiaries have the option of passing the inherited IRA to the next eligible beneficiary within nine months of the owner's death. You can also choose to take lump-sum cash distribution of the inherited amount, which must be included in your gross income for the year.
Entity, Estate Or Trust
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A beneficiary IRA can be given to an estate, trust or other entity, such as a charity organization. With these types of beneficiaries, the inherited IRA must be rolled over into an Inherited IRA, and the RMDs are based on the owner's life expectancy (as if she were still alive) if she was still living on April 1 during the year in which she turned 70 1/2. If the IRA owner died before turning 70 1/2, the account assets must be fully distributed by Dec. 31 of the fifth year following the year of the owner's death (five-year rule).
Contingent Beneficiary
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As a contingent beneficiary, you would receive the proceeds of an inherited IRA if the primary beneficiary (spousal or non-spousal) dies or becomes mentally incapacitated. Often a contingent beneficiary is named to ensure the IRA assets will be used to assist the primary beneficiary. IRA owners may name their spouse as the primary beneficiary and their children as contingent beneficiaries.
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