Your options for handling an inherited CD depend on the type of account and how you inherited it. In general, spouses and anyone named as a co-owner before the account holder's death have the greatest degree of flexibility. The rules regarding IRA CDs are somewhat complicated, and if you were not named on a beneficiary form, it is unlikely that you will be able to maintain the CD at its current interest rate.
A bank CD that is not part of an IRA functions the same as a savings or checking account. If you were listed as a co-owner before the death of your loved one, the account becomes yours upon his or her death. It is not subject to probate and you may leave the money in the same account at the same interest rate if you so choose. If you were not named as a co-owner, the CD likely will become part of the estate and may be divided between you and other heirs. In this case, the executor of the estate may have to withdraw all the money from the CD to disburse it according to the provisions of the will. You may re-invest the money in a new CD, but it will be at the current interest rate. The situation is a bit trickier if the will leaves the entire CD to you. Depending on the terms of the CD contract, you may be forced to leave the account in the original owner’s name until the term of the CD expires. This creates tax complications because the deceased continues to receive interest that is subject to tax, which may complicate closure of his estate.
Traditional or Roth IRA CDs Inherited by Spouses
If the CD is part of a traditional or a Roth IRA account that you inherited on your spouse’s death, you have several choices. One option is to convert it to a beneficiary distribution account, also called an inherited IRA. In this case, both your name and your spouse’s remain on the account and the terms of the CD remain in force. You also may roll over the CD account into your own IRA, but in this case, you will have to purchase a new CD, which will bear the current interest rate.
IRA CDs Inherited by Other Beneficiaries
If you inherited an IRA CD from someone other than your spouse, you may set up an inherited IRA account, but the rules are different than for spouses. You must either withdraw the entire amount by December 31 of the fifth year following the deceased person’s death, or you can set up an arrangement to receive the inherited funds over the course of your lifetime. In either case, the CD instrument can remain in place with the existing interest rate until you withdraw the entire amount.
Beneficiary Versus Will
If you were named on a beneficiary form for the account, you can claim the CD with a copy of the death certificate and some form of personal identification to prove that you are the named beneficiary. If the CD has no co-owner or beneficiary, however, it passes into the estate and becomes part of the probate process, which can take months or even years. An IRA account that has no beneficiary must be disbursed upon the death of the account holder and it is subject to tax, which can be a significant loss for the heirs. There also may be a penalty for early withdrawal from an IRA CD.
- Bankrate.com; You -- Not IRS -- Should Benefit from an Inherited IRA; Teri Cettina; October 2004
- CharlesSchwab.com; FAQs: Inherited IRAs
- AXA Equitable; Choosing a Beneficiary for Your IRA or 401(k); 2007
- SeniorJournal.com; Senior Citizens Need to Understand Why a Will Sometimes 'Won't'; Jeffrey D. Voudrie, CFP; Augsut 2007
- Fairmark.com; Inherited Roth IRA; Kaye A. Thomas; January 2008
- BankingQuestions.com; Dealing with CDs of the Deceased; March 2010
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