Tips For Your Inherited IRA Account

An inherited IRA is a special form of IRA account that includes both the name of the previous owner and the beneficiary of the inheritance. Inherited IRA accounts can be created on behalf and request of beneficiaries of an IRA inheritance if the assets of the original account are to be split among several beneficiaries or the original account can be retitled.

Mind the intricacies of your inherited IRA

As the beneficiary of an IRA inheritance you can choose what to do with the inherited account. The options available to you depend on various factors. Are you the spouse of the deceased person? Is a beneficiary form on file? Is it a Roth IRA? Are there other beneficiaries? Before you do anything with the inheritance, you must learn about the rules that apply to your specific situation. Breaking the rules by taking premature action can lead to unnecessary monetary penalties, most commonly in the form of taxes that could have been avoided in the first place.

Rule number one, you may not just take the money out of the account. With normal IRA rollovers, you can take the money from one of your IRA accounts and put it into another within 60 days. Not so with inherited IRAs. Transfers from one such IRA to another must be specified as trustee-to-trustee transfer.

If you inherited the IRA from your spouse

If you are the spouse of the person who died and the inherited IRA account is the same type of account you own (for example if both accounts are Roth IRA accounts), you can move the assets from the inheritance directly into your own IRA account and thus delaying distribution until you yourself turn 70 and a half. Mind though that all the normal conditions for taking money from your own account apply in that case. That means, if you take money from that account before you reach 59 and a half years, you will pay a penalty for early withdrawal that amount to 10% of the withdrawn amount.

There is also the option to transfer the assets into an inherited IRA account. In that case, the minimum required distribution are going to be based on your age in accordance to the Single Life Expectancy Table. The age that determines the start of the required distributions is that of your late spouse. If your spouse was older than 70 1/2 you must begin taking distributions within the year following your spouse’s death. If he was younger, the distributions can be delayed until he would have reached said age. So if you are older than your spouse was, this option enabled you to delay the minimum required distributions. On the other hand, if you are younger than 59 1/2 this option enables you to access the money from the IRA without the 10% early withdrawal penalty.

If the inherited IRA is from someone other than your spouse

If the original owner was someone other than your spouse your options are to create an inherited IRA account and transfer all assets into this new account or cash out directly. In the former case you have to start taking minimum required distributions until the end of the next year after the late owner’s death. There is no way to delay the distributions. In the latter case you get all the assets immediately but all of them are subject to income tax.

If you are planning the future of your own IRA accounts

If you own IRA accounts of any kind you should make sure to file beneficiary forms with the custodian of the IRA. These determine who will inherit the IRA in case you are no longer around to benefit from them yourself. If you want to provide maximum flexibility to your heirs, make sure to state your spouse as primary and your kids as secondary benefactors in the form. With this setup, your wife will have the option to disclaim the inheritance and pass it on to the kids for potential tax benefits or other reasons. Without this, if your spouse disclaims, the IRA will be awarded to the estate.

Also to be noted, if there is no beneficiary form at all most IRA custodians will award the inherited IRA either directly to your spouse or directly to the estate.