An IRA, or Individual Retirement Account, is a blessing for the aging population in Gilbert , AZ ; it allows them to save for retirement while receiving big tax breaks on the money they are saving. When a person passes before the funds are used up, the IRA will belong to the beneficiary – this will be the person the account holder named or the next of kin. If you are set to inherit an IRA, the rules may not be as simple about receiving or handling the funds as you may hope. Learn about the basics of being an heir to an IRA and save yourself a lot of future headaches.
Why Being a Spouse Makes it Easier to Inherit an IRA
When it comes to being a beneficiary of an IRA, you are classified as being a spouse or as a non-spouse. Spouses named as a beneficiary have a huge advantage when it comes to IRA inheritance. The spouse who gets the IRA funds can actually take the funds from the existing IRA and put them into a new IRA account that is their own. Why does that matter, you may be wondering – it matters because the minimum distribution timeline starts over and the schedule is reset. Once the account is in your name, the same rules apply just as if you set up an IRA with or without inheriting a separate IRA account.
What to Do If You Are a Non-Spouse Inheriting an IRA
Children and other relatives, or those who have been named as an heir by the account holder who are not the account holder’s spouse have a lot more to do once they inherit the account than a spouse. While the spouse can essentially start their own account and move on, the non-spouse cannot rollover the existing inherited IRA to a new account. Non-spouse inheritors will face decisions based on something known as MRDs, or minimum required distribution. This is a tax term used by the IRS to make sure you pay taxes on the account. Non-spouse inheritors must begin taking MRDs before they reach 70-1/2 years old and the funds may be taxed as earned income.
Typically, people have until the end of the first tax year after the original account holder dies to take their initial MRD and then a MRD will be required each subsequent year until the account is emptied or the heir dies. This leaves the party who inherited the IRA with the choice to transfer the existing IRA into their own name or take cash distributions; leaving the funds in the account and taking MRDs may be the best choice unless cash is needed right away. Consulting an accountant is advised if you need cash right away, for large accounts, or if there are many questions remaining about what to do next.
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Summary:
Spouse or non-spouse beneficiaries of an IRA: what you need to know.
Why Being a Spouse Makes it Easier to Inherit an IRA
When it comes to being a beneficiary of an IRA, you are classified as being a spouse or as a non-spouse.
The spouse who gets the IRA funds can actually take the funds from the existing IRA and put them into a new IRA account that is their own.
What to Do If You Are a Non-Spouse Inheriting an IRA
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