What Is an ABO IRA?

A traditional IRA is an account you can use to allocate money for retirement and enjoy the benefit of deferring income taxes on your contributions. The distributions from IRAs are taxable as ordinary income. There are several different types of individual retirement accounts. An ABO IRA is a special type of IRA that you inherit.

The ABO IRA Definition

If you see the ABO banking term on any of your paperwork or ABO on a check, you might be wondering what it stands for. The banking industry uses ABO as an abbreviation for 'as a beneficiary of'. Therefore, an ABO IRA is another term for beneficiary IRA or inherited IRA. A beneficiary IRA is an IRA that you inherit from anyone other than your spouse.

If you inherit an IRA from your spouse, the IRS allows you to treat it as your own retirement account. You cannot treat the ABO IRA as your own. Most frequently, people inherit ABO IRAs from their parents or close relatives.

The ABO IRA Rules

Because you are not allowed to treat the inherited IRA as your own, you cannot make contributions to it or initiate rollovers to or from the account. At a certain point, the IRS will require you to start taking distributions from your inherited account. Figuring out the amount and timing of the required minimum distributions may be complex, and it is best to contact a tax adviser for help. When you receive distributions, you will have to pay any required income taxes as the original owner would have had to.

What to Do if You Inherit an IRA

If you inherit an IRA, you have at least two options. You can keep the original account with the same financial services organization that the deceased owner established it with or you may re-title the account and/or transfer it.

You may benefit from transferring your ABO IRA to your personal financial adviser for consolidation purposes. Bring the most recent account statement and the death certificate of the original owner when you meet with your financial adviser. You will establish a new inherited IRA account and complete a trustee-to-trustee transfer.

Considerations for Inherited IRAs

The IRS has specific rules regarding re-titling of the inherited IRA. If you plan to set up your new inherited IRA account with an online outlet, such as Vanguard or Fidelity, request assistance from their retirement specialists with titling the account. Choosing the wrong title may cause the IRS to treat your account differently, and you may incur unnecessary taxes.

If you are not the sole beneficiary of the IRA, be sure to collaborate with other beneficiaries throughout the process. It is best to work with a dedicated financial adviser if there are any disputes between the beneficiaries.

Also important to note is the Supreme Court ruling of 2005 on inherited IRAs. They ruled that an inherited IRA held by a non-spouse is not exempt from creditors in the case of debt under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This means that the funds in an inherited IRA can be taken by creditors.