The choices you have when inheriting an individual retirement account (IRA) depend on your relationship to the decedent. A surviving spouse has options beyond that of other beneficiaries. One of the simplest choices is a trustee-to-trustee transfer, where the IRA assets are moved into an account naming the decedent as owner and the inheritor as beneficiary. Until distributions are taken, the beneficiary does not owe taxes.
The surviving spouse has the option of claiming the IRA as his or her own, or rolling it over into their own IRA accounts. The rollover must be completed within 60 days of the decedent's death. Non-spousal beneficiaries cannot do this. When the beneficiary is a surviving spouse, the decedent's IRA does not have to be re-titled, unlike any other heir. The surviving spouse may also choose the other options available to non-spousal beneficiaries.
Required Minimum Distributions
Inherited IRA beneficiaries may opt to take begin taking required minimum distributions by December 31 of the year in which the decedent died. To determine the amount, divide the inherited IRA's fair market value as of that December 31 by the Internal Revenue Service's (IRS's) figure in its table for single life expectancy for your age. Failure to take the required minimum distribution within the appropriate time frame can result in a penalty of up to half of the amount that you should have withdrawn but did not.
If the decedent died before the age of 70 1/2, the beneficiary may use the five-year rule, which allows the IRA's assets to be withdrawn at any time, as long as all assets are withdrawn by the last day of the year following the fifth year of the decedent's death. Any penalties for required minimum distributions are usually waived if the assets are withdrawn and the account closed within this time frame.
Options If the Decedent Took Distributions
According to the IRS rules on inherited IRAs, if the decedent was already taking required minimum distributions, the inheritor may either withdraw the entire amount of remaining assets, or take distributions based on either his single life expectancy factor or the decedent's calculated life expectancy. The inheritor must choose the longer of the two life expectancies. Depending on whether the IRA is a Roth or traditional type, distributions are tax-free or tax-deferred.
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