An Inherited IRA or a Beneficiary IRA as it is sometimes known can be opened when an account holder dies. The account is transferred to a named beneficiary from an exiting Tradition, Roth or Simple IRA account. This means that the original contributions stay tax-free and can only be released one the IRS requests it.
The account holder must name the beneficiary which can be a spouse or another person, such as other family members. If there is no beneficiary named a Beneficiary IRA cannot be opened. If the beneficiary is the account holder’s spouse, then the Beneficiary IRA can be opened in that person’s name and they can treat the account as if it were their own.
Non-spouse beneficiaries cannot treat the account as their own and cannot rollover assets into their own accounts. Similarly non-spouse beneficiaries cannot keep the original account open. The new account can be a Traditional, Roth or Simple IRA as well. They can defer distributions until it is requested that they take a Required Minimum Distribution (known as RMD). Additional contributions cannot be made to a Beneficiary IRA.
The beneficiary of an Inherited IRA is subject to certain rules regarding the new account. These are based on the type of Beneficiary IRA the person has, as well as the age of the account holder when the passed on and the kind of IRA that was inherited by the beneficiary.
New rules were introduced to help make the process of having a Beneficiary IRA easier. It used to be the case (before 2001) that the funds in the Inherited IRA had to be used up within a 5 year period. The new rules now allow funds to be distributed over a longer period of time, sometimes even decades. This is to the advantage of the beneficiary as the IRA can continue to be tax deferred.
The new rules also meant that the original account holder could pay smaller RMD’s potentially leaving a larger amount in the account for the beneficiaries to inherit. It also meant that a spouse could either use the new account for themselves or add their own beneficiaries. This would result in the beneficiaries receiving that account one the spouse had died too.
It is vital that everyone has the best retirement plan that is suited to them. Without the best retirement plan for your needs you may receive less than you expect and have little money to live on after you retire.
Beneficiary IRA or Inherited IRA accounts may seem daunting but a wealth of information to help you is available on the World Wide Web. If you prefer, you may talk to a financial expert to help you determine if a Beneficiary IRA is right for you.