IRA Beneficiary Rules

By Kay Lee

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.

Beneficiary Basics

Beneficiaries are the designated recipients of an IRA if the account holder passes away. These IRAs are called inherited IRAs. A beneficiary can be an individual or a group of individuals as well as a trust or estate. While many IRA owners simply leave it to spouses or children, some individuals engage in more sophisticated estate planning. Accordingly, a trust may be the ideal beneficiary for an IRA in order to protect the account’s assets from creditors or even to place restrictions on how the beneficiaries may use the account's assets.

Minimum Distributions

Because of the tax benefits, federal law requires that the IRA makes minimum distributions. These required minimum distributions are based on a variety of factors, including the type of person or entity that receives the IRA, relationship of that person with the account holder and ages of the beneficiary and account holder. The minimum that must be taken by the beneficiary each year is called the required minimum distribution. These distributions are included in your taxable income except for the part that was taxed before or allowed to be received tax-free, such as a Roth account.

Ready to start your LLC? Start an LLC Online Now

Spouse Beneficiaries

Spouses are afforded the most flexible rules with respect to being an IRA beneficiary, as they have more options with respect to what they can do with the IRA. Spouses can elect to be treated as the account holder. They may roll over the inherited IRA into another IRA, which would allow them to continue making contributions if they are not yet 70 1/2 years of age. Spouses are also allowed to remain a beneficiary, cash out the inherited IRA or give an inherited IRA to another person. If the spouse remains a beneficiary of the inherited IRA, she will be allowed to defer taking distributions until age 70 1/2 if the account has been rolled over into her own IRA. Otherwise, the spouse can receive distributions when the late spouse would have turned 70 1/2.

Nonspouse Beneficiaries

The required minimum distribution rules are less flexible for IRA beneficiaries who are not the account holder's spouse. If you are the nonspouse beneficiary of an IRA, you must rename the IRA in your name along with the name of the person from whom you inherited the IRA. Nonspouse beneficiaries may change the bank or financial institution that holds the IRA; however, it must be done through a direct transfer. Otherwise, federal law provides that if you receive the funds -- even if you intend to move them into another IRA -- you will be subject to immediate taxation on the entire amount and possibly penalties, depending on your age.

Minimum Distributions for Nonspouses

Nonspouse beneficiaries -- including estates or trusts named as a beneficiary -- are more restricted than spouses. They must receive the entire IRA before the end of the fifth year after the account holder’s death if the account holder had not reached the age when required minimum distributions were to start. If the account holder had started taking distributions from the IRA, the period by which the account holder receives a distribution is based on actuarial tables based on the beneficiary’s remaining life expectancy.

Ready to start your LLC? Start an LLC Online Now
Inheritance of a Traditional or Roth IRA


Related articles

How to Retitle an IRA When a Successor Beneficiary Inherits the IRA

If you inherit an IRA from your spouse, you can roll it over to a new IRA in your name or merge it with your own existing IRA. Unlike non-spouse beneficiaries, you can keep contributing to it. Everyone has the option to cash out an inherited IRA in a lump sum; however, this could result in a large tax bill. Generally, the IRS permits beneficiaries to withdraw the balance of the account in required minimum distributions each year based on the beneficiary's age or withdraw the entire amount within five years. Whatever you decide to do with your inherited IRA, unless you’ve inherited it from a spouse, you must re-title it. This ensures that the tax-reporting forms for future distributions are appropriately titled.

The Advantages of Changing a Bank Account Title to a Living Trust

A living trust, which is created during the grantor's lifetime, is an estate planning tool used as a holding area for many types of property, including bank accounts, real property and personal property. The grantor, the legal term for the person who creates the trust, can set up his own trust using an online legal document provider or he can hire an attorney to set up the trust. Retitling property in the trust's name, which is known as funding a trust, is a necessary step in creating a functioning trust. A bank account titled to a trust has benefits during the grantor's life and at his death.

What Is the Law for Beneficiary Designation for Bank Accounts?

Planning for distribution of your assets after your death can be a complex and confusing process. Naming beneficiaries for each of your bank accounts is perhaps the simplest, and most important, step you can take to protect your assets and ensure they are passed properly to the intended recipients following your death.

LLCs, Corporations, Patents, Attorney Help

Related articles

Inherited IRA Beneficiary Management Guide

When someone dies with money still in an IRA, the money passes to the named beneficiary of the account. The Internal ...

When a Child Inherits an IRA

Many parents list their children as the beneficiaries on their retirement plan accounts, including IRAs. The Internal ...

Can You Make Your Church a Beneficiary of Your IRA?

If you've planned well enough that you'll have money remaining in your individual retirement arrangement when you pass, ...

The Difference Between Inheriting an IRA vs. Assuming an IRA

Planning retirement account expenditures can be hard to pin down, and some people have funds left over when they die. ...

Browse by category
Ready to Begin? GET STARTED