Inherited IRA Vs. Beneficiary IRA
The terms "inherited IRA" and "beneficiary IRA" refer to the same type of investment account, a special type of Individual Retirement Account that financial customers may open when they inherit a deceased person's IRA. The relationship of the beneficiary to the deceased is important when analyzing how the beneficiary of an IRA opens, distributes and contributes to an inherited IRA, as well as when the funds in the account become taxable.
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Opening an Account
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When someone passes away after naming you as the beneficiary of the IRA account, you have the option of letting the account become your own inherited IRA account; you are in that case "opening" a new account. If you are the spouse of the person who named you as the beneficiary, then you have the option of transferring that money to your own retirement account; but if you are related in any other way, there are only two options: opening an inherited IRA or cashing out the inherited account entirely.
Contributing Funds
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Although the money in an inherited IRA account will continue to grow through interest, you cannot add more money to the account if you are a non-spousal beneficiary; only spousal beneficiaries may treat the money in the account as if it were their own, and so they alone may transfer or add more funds to the account.
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Distributing Funds
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For both spousal and non-spousal beneficiaries, the rules do not restrict how much money you may distribute but rather the time before which all money must be distributed. The key age for both types of beneficiaries is 70-1/2; when the original account owners are older than this upon their death, the beneficiaries must take a Required Minimum Distribution (RMD) every year for their expected life expectancy. If the original account owners are younger, then spousal beneficiaries may delay RMDs until the year when the account owner would have been 70-1/2, but non-spousal beneficiaries must withdraw all funds by the end of five years.
Paying Taxes
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The funds in an inherited IRA are tax-deferred for as long as they remain in the account, and they become taxable once the beneficiary decides to distribute them. Beneficiaries who distribute all the funds in an account at once will pay full taxes and, depending on the amount of money, involved may find themselves in a new tax bracket, so beneficiaries should be cautious when planning their distributions.
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References
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