Why Do People Disclaim Their IRA?

••• Jupiterimages/liquidlibrary/Getty Images

If someone inherits an IRA as the primary beneficiary, IRS rules give that person the option to disclaim the inheritance and pass the IRA money to the individuals next in line to inherit the retirement account. Disclaiming an IRA may allow the money to be passed along, preserving future asset growth and lowering taxes.

Disclaiming Procedure

The primary beneficiary of an IRA can elect to disclaim the inheritance of an IRA rather than accept ownership of the account. If the IRA is disclaimed, the account passes to the listed contingent beneficiary. It is important to have one or more contingent beneficiaries listed on an IRA if there is a possibility the primary beneficiary will disclaim. The election to disclaim an IRA inheritance must be done within nine months of the IRA owner's death. The beneficiary can elect to disclaim the full value or just a portion of the account.

Paying It Forward

One reason to disclaim an IRA is thatthe primary beneficiary does not need the money and the money would be useful to the contingent beneficiary. For example, a spouse is the primary beneficiary, but has enough money and assets to maintain her lifestyle, and the couple's child is the secondary beneficiary and could make good use of the money. Disclaiming the IRA passes the money directly to the child, avoiding any tax complications of the spouse cashing out the IRA and gifting the money to the child.

Minimizing Tax Withdrawals

Disclaiming an IRA can be used to stretch out the tax-deferred growth of an IRA account by reducing the size of required distributions. Consider a couple, both age 85, with large IRA account balances, plus significant other assets. At age 85, the minimum required withdrawal from an IRA is approximately 7 percent of the account value and will increase each year. If the surviving spouse beneficiary disclaims an IRA to a 55-year-old son, the son would have to make withdrawals based in his age. For a 55-year-old, the minimum distribution amount is about 3.5 percent in the first year. Plus the withdrawals skipped a generation, allowing the son to receive the full, current value of the IRA.


The disclaiming of an IRA can allow a large-value IRA to pass through to the contingent beneficiary without the value being included in the primary beneficiary's taxable estate. If the primary beneficiary has an estate large enough to trigger the estate tax, or even worse, if the inherited IRA puts the estate size into estate-tax territory, disclaiming the IRA may result in significant estate-tax savings.