Can You Benefit from an Inherited IRA?

If you are smart, your inherited IRA or Individual Retirement Account can put a nice sum of money in your hands, provided you strictly follow IRS rules.

Failing to do so could mean some hefty taxes and penalties.

An Inherited IRA is an account you inherit when the owner of the IRA dies.

The IRA account holder appointed you as the beneficiary, which means that you now have ownership of the account.

The best thing about an inherited IRA is that you get the exciting opportunity to continue with your benefactor’s tax-deferred investing.

The tax advantage you gain from this can make your inheritance appreciate significantly. It’s a good situation as long as you are familiar with the IRS rules related to inherited IRAs. Inherited IRAs are relatively new. And yes, you can also inherit a Roth IRA, but these are governed by different IRS rules.

You have many options, depending on whether your inherited IRA is spousal or non-spousal. Let us look at each in turn.

A spousal inherited IRA and its options

Consider yourself lucky if your inherited IRA is from your spouse, rather than your parent or an aunt. As a spouse, you have special privileges. Here are your options:

  • You can roll over the inherited IRA into your own existing or new IRA account and continue to contribute to it. Non-spousal beneficiaries cannot do this.
  • When the IRA is transferred to a beneficiary distribution account, it is also referred to as the beneficial or inherited IRA. You own it jointly with the deceased person. If you happen to be younger than 59 ½, you can withdraw money from the IRA without incurring the ten percent early withdrawal penalty. Your beneficiary distribution account can be advantageous if you are older than the deceased spouse.
  • You can give your inherited IRA to your heir, enabling the account to grow, tax-deferred, for life. But to do this, you must get legal advice and discuss it with the original account holder before he or she dies.

If you want to cash out the account, look at the tax implications first.

The difference between an inherited IRA by a spouse and a non-spouse is that the spouse is eligible to rollover the inherited IRA into her existing IRA without penalties. A non-spouse beneficiary cannot do that.

What about non-spousal inherited IRAs?

If your inherited IRA is not from your spouse, it’s a different ballgame. You can neither merge it with your existing IRA nor continue to contribute to the inherited IRA. If you expect to inherit an IRA from someone else, you might want to do a little planning because the options you have can be tricky. For one thing, the IRA must specifically name you as the beneficiary. And, if you are only one of the beneficiaries of the IRA, ensure that the account is separated as quickly as possible.

Can you remain a beneficiary?

If you remain a beneficiary, you must transfer the IRA assets to a beneficiary distribution account or beneficial IRA. You hold the beneficial IRA jointly with the deceased, as we said earlier. So your account will be “Jane Doe IRA (deceased 10 September 2008) F/B/O (for the benefit of) John Doe, beneficiary.” Here, the IRA should not be directly in your name, since it will make your inherited IRA fully taxable in one year.

No matter how old you are, you will need to make the minimum annual distributions from the inherited IRA.

The entire amount must be withdrawn over five years.

As a non-spouse beneficiary, you can move the inherited IRA in the form of a trustee-to-trustee transfer to another financial company just like a rollover IRA.

Plus, you can invest the money however you like.

The legalities surrounding an inherited IRA can be complex.

You would benefit from seeking the advice of a trusted financial adviser if you happen to inherit an IRA.


Return from Inherited IRA to Annuities


    Subscribe to Our Blog
  • RSS
  • Googleplus
  • Yahoo
  • My MSN
  • Bloglines



Don't worry -- your e-mail address is totally secure.
I promise to use it only to send you Retirement Investment Planning.