Inheriting IRAs

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Can IRAs Be Inherited?

Yes, Individual Retirement Accounts (IRAs) can be transferred to heirs after death.  However, many of the restrictions regarding use of the funds remain on the accounts.  The account does provide the opportunity for continued tax deferred investing, which can increase the value of the inheritance, but the tax laws regarding the inheritance can be very complex.  Many of the rules will also depend on whether the inheritor is the spouse of the deceased.


What Are the Rules Regarding Spousal Inheritance?

Inheriting from a spouse is less complicated and provides more options than inheriting from a non-spouse.  A spouse can decide to:

By keeping the account, either as a beneficiary or through a roll-over, the spouse can defer taking funds out of the IRA until the age 70 1/2, the point at which annual required minimum distributions begin. This deferral option can be a significant benefit for younger surviving spouses.

What Are the Rules Regarding Non-Spousal Inheritance?

Non-spouses have fewer options and face more restrictions when inheriting IRAs.  If the inheritor is not a named person, but rather a trust, estate, or other entity, the money must all be withdrawn and taxed within five years, if the owner had already begun withdrawing.  If several beneficiaries are named, it is important that they separate the account as soon as possible so that each can decide how to handle their own account.

Generally, non-spousal inheritors have two of the same options as spouses:

It is important that the inheritor make a decision and begin taking any minimum required distributions by December 31 of the year after the account owner's death to avoid taxes and penalties.

Do I Need a Lawyer?

The tax laws regarding inheriting IRAs are very complex and fairly new.  There are many specific requirements and opportunities for penalties and taxes that an experienced tax attorney can help you avoid.  A lawyer can advise you of the option that is best for you and help you get the most out of the account.

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Last Modified: 08-26-2011 02:09 PM PDT

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