Beneficiary IRA

An Individual Retirement Account, or IRA, is an investment vehicle which is specifically designed for the retirement of employed individuals. Most people who want to have a secured retirement would prefer to invest part of their income in an IRA. An IRA can hold several types of investments, and so it would be easier for the IRA owners to diversify their funds and create a better investment portfolio. Most employed individuals who earn a taxable income in the form of salaries, wages, commissions, bonuses, and service fees may open an IRA as long as they meet the qualifications. When an individual opens an IRA, then he is considered as an IRA owner.

The IRA owner has the right to designate his beneficiaries, and he must do this before he reaches the age of 70 and 1/2. The final beneficiary that he designates before the death of the IRA owner will be the one to inherit the funds. If an IRA owner prefers to choose more than one beneficiary, he has to state what percentage of the IRA funds will go to each beneficiary. The IRA owner may change his beneficiaries or the percentage that they receive any time he likes.

What Happens if the IRA Owner Dies?

There are times when an individual does not reach his retirement age, especially if certain misfortunes happen. When an IRA owner dies earlier before he uses up all his IRA funds, his IRA money will go to his designated beneficiary. Thus, IRA owners are required to designate their beneficiary before the age of 70 and 1/2.

The beneficiaries of the IRA owners who pass away will inherit the IRA funds, and such inherited IRA is governed by certain rules and regulations, depending on what type of beneficiary IRA it is. If, for some reason, the IRA owner does not designate a beneficiary, then the funds will automatically go to his estate upon his death.

Types of Beneficiary IRA

Generally, there are two types of IRA beneficiaries, and these are:

  1. Individual beneficiary, and
  2. Non-individual beneficiary

Types of Individual Individual Beneficiary IRA

If a beneficiary is an individual, the rules will depend on whether the individual beneficiary is a spouse or non-spouse. For spousal IRA (i.e. a spouse inherits the IRA), the spouse can either choose to inherit such IRA and treat it as plain inherited IRA, or choose to roll the funds over to his or her own IRA and treat it as his or her own (see IRA rollover). Spousal beneficiaries do not pay taxes for the inherited IRA distributions. Furthermore, the spouse can treat the inherited IRA as his or her own only if he or she is the sole designated beneficiary.

If a spouse chooses to treat the inherited IRA as his or her own, and the IRA owner dies before he reaches the age of 70 and 1/2, the spouse beneficiary does not have to take the distributions until the year the IRA owner (the deceased spouse) would have reached the age of 70 and 1/2. The spouse beneficiary may decide to treat the inherited IRA as a beneficiary IRA for a while, then later decide to rollover the funds to his or her own IRA.

If a spouse chooses to rollover the inherited IRA funds to his or her own, he or she has the right to decide on which type of investments he or she will place the funds with. The spouse may also opt to place the funds to a Roth IRA to enjoy tax-free profits for the investments. Spouse beneficiaries may seek for the assistance of financial advisers on how to open a Roth IRA and rollover an inherited IRA to Roth. Choosing the best IRA companies is definitely a wise thing to do.

Non-Spousal Beneficiary IRA

For non-spousal beneficiary, which refers to the beneficiary who is any third-party individual except for the spouse, rolling over the inherited IRA funds to the beneficiary’s own IRA is not allowed. Non-spousal beneficiaries are also required to take minimum distributions from the IRA per year.

As per IRS rules on non-spousal beneficiaries, they may cash in on the inherited IRA funds after five years from the death of the IRA owner, or they may opt to have the IRA funds distributed to them in smaller amounts until the beneficiaries reach their life expectancy age. In addition, non-spousal beneficiaries are required to pay the taxes on the inherited IRA funds distributed to them as if they are regular income.

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