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A Beneficiary IRA allows inheritors/beneficiaries to manage inheritance passed down to them in the form of a retirement account. This allows the deceased account holder to pass along tax-advantaged savings to his or her heirs. But, oftentimes, the first time one learns about a Beneficiary IRA is when he or she suddenly inherits a retirement account balance.
Because of the general lack of education about a Beneficiary IRA, we provide 10 things to know about these accounts.
- Interestingly, the tax code provides no real definition of a Beneficiary IRA. While “inherited IRA” does appear in IRC § 219 and § 402, we can only infer its meaning: an IRA held by an inheritor (beneficiary) of a now-deceased account holder.
- The terms “Inherited IRA” and “Beneficiary IRA” are interchangeable. Generally, Kingdom Trust uses “Beneficiary IRA” for this type of account.
- A beneficiary (or “bene”) must follow specific rules for retitling the account. Among other rules is that you must leave the original account holder’s name in the title. Retitling may also extend to any assets inherited.
- If the sole beneficiary, a spouse bene can transfer the assets directly into another IRA. He or she may elect to treat the assets as his or her own in an existing or new IRA.
- Both spouses and non-spouses have a variety of other options, depending on whether the deceased was under or over 70½. The bene can open a Beneficiary IRA in his or her own name and transfer the inherited assets to that new IRA. He or she can then take required minimum distributions (RMDs) using the life expectancy method. If that option isn’t preferred, the bene can open the new IRA and distribute the assets over a five-year period. For Traditional IRAs, this option only works if the account holder was under 70½. Alternatively, he or she may immediately distribute the inherited assets in a lump sum. The bene wouldn’t open a Beneficiary IRA via this method and must pay income taxes as a result of the distribution.
- Distributions from a Beneficiary IRA are not subject to the 10% early withdrawal penalty. The custodian considers these as “death distributions,” and as a result, they avoid the penalty regardless of the bene’s age.
- There is no 60-day rollover rule for Beneficiary IRAs. So, in a tax-deferred account, if you withdraw money from the Beneficiary IRA, it is taxed.
- RMDs are required on inherited Roth IRAs. If you inherit a Roth IRA and transfer the assets into a Beneficiary Roth IRA, you must take RMDs. However, as long as the assets have been in the Roth for five or more years, the RMD amounts should be income tax-free.
- You can choose not to take the inheritance. Whether to avoid taxes or to allow the assets to pass to other beneficiaries, you can “disclaim” the account. You must do this within nine months of the account holder’s death and obviously before taking possession of any assets.
- Opening a Beneficiary IRA at Kingdom Trust is really no different than opening a normal IRA. Simply complete our online application to get started. One difference for a Beneficiary IRA is that we require a copy of the deceased’s death certificate.
Beneficiary IRAs could be tricky to the average investor, so it’s important to consult your team of professionals. Discuss your options with an investment advisor, tax professional and legal consultant prior to making a decision. Also reference Publication 590-B, as it discusses inheriting an IRA in greater detail.
It will also be important to speak with your custodian prior to taking any action. This helps ensure you know the process required to roll over or transfer inherited assets.
Have questions? Feel free to chat with us on this or any other page of our website to discuss how to open a Beneficiary IRA with Kingdom Trust.