Options With the Death of an IRA Account Holder
Individual retirement accounts provide taxpayers with a tax advantaged means of setting aside funds for their retirement years. There are two primary types of IRAs, including traditional IRAs and Roth IRAs. Account holders must begin taking mandatory withdrawals from their traditional IRAs in the year they turn 70 1/2 years old. There is no mandatory withdrawal age for Roth IRA account holders. Tax law and Internal Revenue Service regulations provide different options to beneficiaries when an IRA account holder dies with funds remaining in her account.
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Spouse
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A spouse who is the sole beneficiary of a traditional IRA has three primary options for handling the IRA. She may treat the IRA as if it were her own account by making contributions to the account or by designating herself as the owner of the IRA. She may roll over the funds from the inherited IRA into her own IRA or another qualified plan. She may elect to treat herself as the beneficiary of the IRA rather than the owner of the IRA. A beneficiary account allows a spouse who is less than 59 1/2 years of age to make withdrawals without incurring the usual 10 percent tax penalty.
IRA Inherited From a Non-Spouse
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A beneficiary who inherits a traditional IRA from someone who is not a spouse, such as a parent or other relative, may not claim the IRA as her own. She may not make contributions into the IRA and she may not roll over funds from the inherited IRA into her own IRA or any other qualified plan. The beneficiary may take withdrawals from the inherited IRA, but the amounts withdrawn would be subject to federal income taxes.
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Other Options
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Beneficiaries of an inherited IRA have the option of cashing out the entire balance remaining in the account. All funds withdrawn would be subject to federal income taxes in the year they are withdrawn. The beneficiary may also elect to give the IRA to another beneficiary, provided the other person was designated as a contingent beneficiary in the original IRA account holder's contract. This option may provide significant tax savings and investment growth opportunities if passed on to a young beneficiary.
Roth IRAs
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Death benefits are treated differently for Roth IRAs. Once a Roth IRA account holder dies, the entire contents of the IRA must typically be distributed to her beneficiaries by the end of the fifth calendar year following her death. There are some exceptions to this policy. A spouse who is the sole beneficiary may wait to begin taking withdrawals from the Roth IRA until the year the original account holder would have reached 70 1/2 years of age. A spouse who is the sole beneficiary may also elect to treat the Roth IRA as her own.
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