If you have an IRA with funds in it when you die, the money will go to the beneficiaries that you designate. How the distribution goes will depend on several factors like whether you were already taking money out of the account. If the money goes to your spouse, he will have more options to consider than if the money goes to someone else.
Designating a Beneficiary
When you set up an IRA, your IRA provider will make you designate a beneficiary for your account. You could also potentially choose multiple beneficiaries for your IRA account. If you are married and you want to choose someone other than your spouse as the beneficiary, that individual may have to sign a release form. You can also list contingent beneficiaries for your IRA. These beneficiaries would get the account if your primary beneficiaries pass away.
If your spouse is a beneficiary, he will have two options to choose from when it comes to receiving the money from the IRA. Your spouse can choose to start receiving distributions from the account immediately. The distributions can be based on his life expectancy. He could also elect to take all of the money out of the account within five years of inheriting it.
The other option that your spouse has is to roll the money into another IRA. If he elects this option, the money will be mixed with his existing IRA assets and he can continue to contribute to it.
If your IRA goes to a nonspouse, she will not have the option to roll the funds into another IRA. Instead, she will have to start taking distributions from the money. If you were already taking distributions out of the account because you are retired, the beneficiary can then continue taking those distributions. She could also elect to take all of the money out of the account within five years of inheriting the IRA money.
When the money is inherited by the beneficiary, taxes are owed. The taxes are due in the year in which money is withdrawn from the account. The money that comes from the IRA is regular income added to the beneficiary's regular income and it is taxed at the appropriate marginal tax rate. Many designated beneficiaries like to spread out the minimal payments as long as possible so that they can stay in a lower tax bracket.
Choosing what to do with an IRA once it is inherited can be difficult. Beneficiaries should seek the help of a financial planner or an accountant to help make this decision. Tax implications and other rules need to be evaluated prior to making a choice. By consulting a professional, you can often avoid paying additional taxes on the money that you inherit.
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