When you open an individual retirement account, you can name primary and contingent beneficiaries. The decisions you make on an IRA beneficiary form trump those in a will or living trust. If a will and a beneficiary form name different IRA beneficiaries, the form rules. You can change IRA beneficiaries whenever you want, except in community property states.
When someone other than a spouse inherits all or part of an IRA, the beneficiary can create a new successor beneficiary IRA and request a trustee-to-trustee transfer. The Internal Revenue Service allows this as long as you title the new IRA in the name of the deceased and for the benefit of the beneficiary. A properly titled beneficiary IRA looks like this: "Bill Smith, deceased, inherited IRA for the benefit of Stanley Smith, beneficiary." A non-spouse beneficiary has only limited control over an inherited IRA.
A beneficiary can’t transfer money into or out of a successor beneficiary IRA, can’t make contributions and must observe inherited IRA withdrawal requirements. The beneficiary can decide how to invest the money within the beneficiary IRA, which is one of its main attractions. For example, suppose you and your two brothers each inherit one-third of your mother’s IRA. By moving your third to a beneficiary IRA, you can invest in assets that might not interest your siblings.
You can choose to withdraw the entire balance of an inherited IRA by the end of the fifth year after the death of the owner. Distributions from a traditional IRA are taxable, so some beneficiaries prefer to stretch out annual minimum withdrawals. The stretch-out period depends on whether the owner died before the required beginning date for minimum distributions. If he did, use the life expectancy of the oldest beneficiary. Otherwise, use the longer of the owner’s or oldest beneficiary’s life expectancy.
A spouse can assume ownership of an inherited IRA, which allows her to postpone distributions until age 70 1/2. However, the spouse can elect to take distributions in the non-spouse way and can set up a beneficiary IRA. If any of the beneficiaries is not an individual, the trustee must distribute the IRA using the five-year rule. In a community property state, a spouse must approve the naming of any other IRA primary beneficiaries. Without permission, the owner can’t change the primary beneficiary.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.