A traditional individual retirement account (IRA) is a type of retirement savings fund that is used during the years a person is working, and is used as a source of income during retirement. Funds in an IRA are taxed when they are distributed from the account, either to the original owner or to a beneficiary. A traditional IRA can be probated, but this is not generally the best plan.
Inheritance of a Traditional IRA
If a person who owns an IRA dies, the IRA will either go to a named beneficiary, or if no one has been named, to the decedent’s estate. An IRA that is part of an estate must go through probate and will ultimately be required to be distributed within five years. An IRA left directly to a beneficiary has an existence based on the beneficiary’s lifetime, providing significant tax benefits for the survivor. These rules may vary based on the specific situation.
The owner of a traditional IRA can use a beneficiary form to name a beneficiary for the account. This form is available from the custodian holding the IRA funds, and is the best way to transfer ownership of an IRA upon the original owner’s death. If the account owner dies, the IRA will go directly to the designated beneficiary. The process is quick and avoids the imposition of probate fees. It also makes the funds in the IRA unavailable to pay any creditors’ claims against the decedent.
Probate is a legal process that evaluates a decedent’s estate and determines the disposition of all of his assets. During probate titles are cleared and transferred to the new owners, debts are dealt with, and any disputes related to the deceased person’s assets are resolved. Bank accounts and retirements funds that do not have a beneficiary named are distributed by the court. Small estates do not require probate, but if an IRA was left without a named beneficiary, it must go through the process.
It is best to avoid probate if possible, for two main reasons. The first issue is that probate can tie up an estate for as long as one year as all of the necessary details are attended to. For heirs who want to finalize an estate, or who need money in order to deal with the decedent’s property, it can be very difficult to wait that long. There are also significant fees associated with the probate process, as high as 5 percent of the estate, that reduce the amount of money available to the heirs.
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