How Is a Beneficiary IRA Different From Traditional IRA?

A traditional individual retirement arrangement allows the owner to designate beneficiaries to receive the value of the IRA when he dies. When a beneficiary inherits the account, it becomes a beneficiary IRA and different IRS rules apply concerning when the money must be withdrawn and taxes paid.

Minimum Distributions

The money in a traditional IRA grows tax-deferred until withdrawals are made. The IRS does not allow an owner to leave money in this type of IRA indefinitely. At age 70 1/2, the original owner of an IRA must start making yearly withdrawals, called required minimum distributions. When the owner dies, the IRA beneficiary is also subject to RMD rules. The beneficiary's minimum distributions are based partly on his age. The IRS includes actuarial tables on its website to help IRA owners figure out how much per year they are required to withdraw.

Spouse Beneficiary

If the IRA beneficiary is the original owner's spouse, he can keep the IRA with an ownership name change or roll the assets into another existing IRA. The required minimum distribution rules for the spouse beneficiary are set as if he was the original owner. Minimum distributions must start at age 70 1/2. If the spouse is over 70 1/2, minimum distributions must be taken based on the beneficiary spouse's age. An additional option for a spouse beneficiary is to disclaim all or part of the IRA assets. The disclaimed assets would go to the listed secondary beneficiaries. This allows the IRA to be passed to a younger generation without being taxed.

Other Beneficiaries

If the IRA beneficiary is not the spouse of the original IRA owner, the distribution rules are designed to get the money out of the IRA and to have taxes paid on the assets. One option gives the beneficiary up to Dec. 31 of the fifth year after the IRA owner's death to withdraw 100 percent of the assets. The money can be withdrawn in any amount at any time up until the deadline. The withdrawals will be taxed in the year they are taken. The other option is to start with periodic annual withdrawals by Dec. 31 of the year after the owner's death. The annual withdrawals must be at least the minimum amount based on the beneficiary's age and the IRS life-expectancy tables.

Considerations

If you are the beneficiary of an IRA, it is important to contact the account custodian -- the bank or financial company where the account is held -- to determine the steps to make sure you are properly listed on the beneficiary IRA. A spouse beneficiary may be able to just change the ownership listing of the account. Other beneficiaries may need to transfer or roll over the IRA assets into a designated beneficiary or inherited IRA account. Do not miss the required distribution dates. IRS penalties can be up to 50 percent of the amount you failed to withdraw on time.

 

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.