Be Sure to Retitle an Inherited IRA
Correctly retitling an inherited IRA is immensely important to a beneficiary. It can
mean the difference between being taxed immediately on the entire amount
instead of tax deferred. Many people do not realize how critical this action is.
An IRA is a long term tax shelter. The longer the money is left in the account, the
greater the return will be. Invested in mutual funds, that money is busy earning
more money. Tax deferred earnings include interest, capital gains, and dividends.
Like yeast, the growth of these earnings can become something much bigger,
lasting well into the future.
Heirs will owe income tax on a traditional IRA if they raid the account, due on each
withdrawal. Withdrawals on traditional IRAs are required at age 70 ½.
Although there are no up-front tax deductions, Roth IRAs are tax free when
money is withdrawn by account holders. There are no withdrawal requirements
for Roth IRAs during the owner’s lifetime. This means the account balance can
However, heirs are required to take distributions. Required Minimum Distribution
rules are complex and should be explained by an attorney or other experienced
Spouses who inherit an IRA from a husband or wife can retitle the account in their
own name, or roll it over into an IRA of their own. However, spouses under age 59
½ may incur a ten percent penalty if they withdraw some of the money. By
retitling the account in both names, the money can be taken out without penalty.
The new title will have both the deceased person’s name and date of death, and
the name of the beneficiary. An example of this is “John Doe IRA (deceased
January 3, 2013) for the benefit of Jane Doe, beneficiary.”
By retitling in his or her own name after the surviving spouse reaches age 59 ½,
further withdrawals can be delayed. Otherwise the date will depend on the date
when the deceased spouse would have turned 70 1/2.
The benefits of retitling as an inherited IRA also extend to those beneficiaries who
are not spouses.
If you are leaving an IRA to someone, be sure to leave instructions about retitling.
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