Beneficiary IRA Spouses - Important Information
An IRA account that is transferred into a spouse or other beneficiaries’ name after the death of the account holder is known as a Beneficiary IRA. It can also be called an Inherited IRA. This process means that the money stored in the original account is transferred to a new account in the beneficiary’s name. The type of original account could have been a Traditional, Simple or Roth IRA. The transferred money stays tax free and is released at the request of the IRS.
The account holder must name the beneficiary which can be a spouse or another person, such as other family members. If there is no beneficiary named a Beneficiary IRA cannot be opened. If the beneficiary is the account holder’s spouse, then the Beneficiary IRA can be opened in that person’s name and they can treat the account as if it were their own.
If the beneficiary is not a spouse then they cannot use the account as they wish and they are not allowed to move the funds to their own account. Non-spouse beneficiaries are also not allowed to keep the existing IRA account open. A Beneficiary IRA can be either a Roth, Simple or Traditional account but more funds cannot be added to the new account. The recipient will be asked to take an RMD (Required Minimum Distribution) but contributions can be deferred until this time.
There are certain rules pertaining to the new accounts which are based on factors such as the type of the original account, the type of the new account and the age of the account holder when they passed away.
There were new rules brought out in 2001 which makes the whole process and the advantages of a beneficiary IRA a lot clearer and simpler. Previously the funds in an Inherited IRA had to be depleted within a 5 year period. It is now the case that the funds can be distributed over a period of many years, frequently over many decades. This way the funds can continue to be tax deferred which is an advantage for the beneficiary.
The rules also mean that the account holder could take smaller Required Minimum Distributions which meant there was a greater chance of a higher value remaining in the original IRA. Spouses of the original account holder could also use the Beneficiary IRA for their own means or add names to it so that they would then leave the funds for named beneficiaries upon their death.
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This may all seem quite confusing but it is in fact very simple. If you would like to find out more about Beneficiary IRA accounts, you can get your questions answered online. Alternatively you could speak to a financial advisor who will present the information to you in easy to understand terms.
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