If you are the beneficiary of an IRA, from a loved one who has passed away, you can consider yourself fortunate that your loved one planned so well for your financial future. IRA accounts are excellent tax-advantaged retirement vehicles, and in the case of Roth IRAs, tax-free.
The decision of what to do with an inherited IRA is an important one, and there are many considerations to take into account, including taxes on a dead spouse’s IRA account, and time frame for distributions.
Your Options For An Inherited IRA
If you are the beneficiary of the IRA account, you have choices, and do not have to take a lump-sum distribution. It is in fact, usually better to leave the funds in the IRA, and take advantage of the account’s tax-deferred growth.
Your options will also depend on your loved one’s age when they passed away if you have inherited a traditional IRA, specifically if they died prior to or after April 1st of the year following the year they turned 70½. This is the time the owner would have been required to take minimum distributions from the account.
The rules for IRA distributions and taxation are some of the most complicated of their kind, and every situation is unique The retirement specialists at ETrade are available to answer your questions concerning inherited retirement accounts, or you can chose to seek the advice of a trusted financial professional.
What Are The Taxes On A Dead Spouse’s IRA Account?
There are special rules that apply only to the deceased IRA owner’s spouse when it comes to taxes on a dead spouse’s IRA. If the spouse of the deceased is named the sole beneficiary of the IRA, they can take withdrawals over their life expectancy, with the withdrawals beginning no later that the date on which the owner of the IRA would have been 70½ years old.
If your spouse is named your IRA beneficiary they can choose to treat the IRA as their own. This amounts to a rollover of the IRA. The spouse is they only beneficiary with this option. If your spouse chooses the rollover option, they will not have to begin receiving distributions when they turn 70½.
If your spouse is your IRA’s beneficiary, then they would most likely want to wait to begin withdrawals, with a child or other person would generally want to start taking distributions before the end of the year following the year you pass away.
Non-Spouse Beneficiary Options
If you are not the spouse of the deceased IRA owner, and your loved one was kind enough to name you as the IRA’s beneficiary, you may be wondering what happens next. If you are willed a traditional IRA when the person passes away is an important factor in when you receive distributions.
If the owner of the IRA had already begun taking the minimum required distributions, the remainder of these distributions must be paid out at least as rapidly as would have been had the IRA owner not passed away.
This means that as the non-spouse beneficiary of the IRA your options are limited, as you usually can not lengthen he distribution schedule that was chosen by the owner of the IRA, on his required beginning date.
If the owner of the IRA passes away prior to the required beginning date you have a few more options. Usually, the entire balance of the IRA must be distributed according to the five year rule, which dictates that the balance must be distributed by December 31st of the fifth year after the owner’s death.
The rules for the taxation of an inherited IRA vary according to circumstance, and you should always discuss your unique financial situation with an accountant or a qualified IRA specialist such as the trained professionals at ETrade.