IRA Beneficiary Inheritance Options
Individual Retirement Accounts, or IRAs, grow tax-deferred until retirement, when the money can be withdrawn as retirement income. IRAs also have designated beneficiaries who are entitled to the IRA proceeds if the owner dies. There are different rules for spousal and other beneficiaries. The IRS rules require that the money be withdrawn from an IRA at some point and be taxed.
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Spousal Rollover
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Spousal beneficiaries have the option to roll over the IRA assets into their own new or existing IRAs, either regular or Roth type IRAs. At that point the IRA belongs to the spouse and distribution requirements are based on the spouse's age. If minimum distributions are not yet required, random withdrawals can be made at any time.
Spousal Disclaimer
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Within nine months of the IRA owner's death, a spouse can disclaim inheritance of an IRA. At that point the IRA will pass to the next beneficiaries listed. This option can be taken if the spouse does not need the money and does not want to pay income taxes on required withdrawals. The disclaimer also removes the IRA money from the spouse's estate.
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Required Distributions
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Non-spousal beneficiaries can start taking annual required minimum distributions by the end of the year following the year of the IRA owner's death. The required minimum distribution is based on the life expectancy of the beneficiary. Younger beneficiaries can stretch the IRA payout over 40 or 50 years and let the balance continue to grow tax deferred.
Lump Sum Distribution
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Any IRA beneficiary can take his share of the IRA as a lump sum distribution. This election requires the beneficiary to take the full amount of his IRA inheritance. The proceeds are fully taxable as regular income for the year in which the distribution is made.
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