The Difference Between Inheriting an IRA vs. Assuming an IRA

By Michael Keenan

Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. If someone dies with money remaining in an IRA, the account goes to the person the decedent names as the beneficiary of the account. Depending on your relationship with the decedent, you may have the option of assuming the IRA rather than treating it as an inherited IRA.

Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. If someone dies with money remaining in an IRA, the account goes to the person the decedent names as the beneficiary of the account. Depending on your relationship with the decedent, you may have the option of assuming the IRA rather than treating it as an inherited IRA.

Inheriting an IRA

When you inherit an IRA, you must take required minimum distributions from the account. You can satisfy this requirement by withdrawing all of the money from the IRA by the end of the fifth year following the year of death. If the death and subsequent inheritance occurs in 2013, for example, you have until December 31, 2018 to withdraw the money from the account. Alternatively, you can take required minimum distributions each year over your life expectancy until the account is empty.

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Assuming an IRA

Assuming an IRA means opting to treat the IRA as if it was your own account. Only spouses of the decedent are allowed to make this election, so if you weren't married to the decedent, you cannot assume the IRA. The advantage to assuming an IRA is that you don't have to take the minimum distributions required for those who inherit IRAs. However, you still must take any minimum distributions that would be required based on your own age.

Transferring IRA Funds

When you inherit an IRA, you cannot combine the inherited IRA with any IRAs in your own name. In fact, the only way you can move inherited IRA funds is through a direct transfer of the funds from the inherited account into another account clearly titled as a beneficiary IRA. Additionally, you cannot roll over any distributions. If you assume an IRA, however, the funds are treated no differently than funds in your other IRAs, so you are free to consolidate them into just one account.

Early Withdrawal Penalties

Generally, if you withdraw money from an IRA before you turn 59 1/2 years old, you must pay a 10 percent additional tax, on top of any regular income taxes you owe. If you take a distribution as a beneficiary, the extra tax does not apply because beneficiary distributions are tax exempt. If you elect to assume the IRA, however, you are no longer a beneficiary of the account, so you will not be able to use the exemption for early withdrawal.

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Inherited IRA Beneficiary Management Guide

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IRA Beneficiary Rules

An individual retirement arrangement is a savings plan designated for retirement purposes. By designating it as retirement savings and giving up the freedom associated with typical savings accounts, individuals receive preferential tax treatment. The type of plan – whether traditional IRA or Roth IRA – will determine the timing of the tax preference. Traditional IRAs provide the account holder with a tax deduction in the year the contributions were made, while Roth IRAs do not provide an up-front deduction, but allow for tax-free distributions at retirement. Given the tax benefits, individuals may contribute to an IRA until they reach age 70 1/2.

How Does an Estate Treat an IRA?

An IRA is a unique creature when it comes to an estate inheriting the IRA or having to pass it along to beneficiaries. If the IRA names a beneficiary, the estate can simply pass along ownership of the account. However, if the decedent didn't name a beneficiary, the tax rules are more complicated.

401(k) Inheritance Laws

Many companies sponsor 401(k) plans to help their employees save for their retirement years. When a person dies with money remaining in the plan, the named beneficiaries receive those monies. However, the IRS has rules that specify when distributions from the plan must be taken and the tax consequences of those distributions.

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