Choices for an IRA Beneficiary

As beneficiary of an IRA, you must decide among the three following irrevocable choices: disclaim the IRA, assume the IRA, or inherit the IRA.

Disclaim the IRA
You may refuse the IRA assets, in which case the IRA will fall to the alternate beneficiary. If there is no alternate beneficiary, the IRA will be passed on to the deceased’s estate.

Assume the IRA
This choice is only if you are the spouse of the deceased. If it is a traditional IRA, it becomes the your IRA and allows you to move the assets into your own IRA. All of the regulations which govern IRAs apply. Therefore, you can keep the IRA fully invested tax-deferred until mandatory minimum distributions at age 70 ½ must begin. You may also make withdrawals after age 59 ½ penalty-free, but withdrawals before this age may incur federal taxes and a 10% penalty. You can make further contributions depending on your age and earned income and will also want to designate a new beneficiary.

If it is a Roth IRA, this option is possible only if the spouse is the sole primary beneficiary. You will not have to take minimum distributions at age 70 ½ because there are no mandatory minimum distributions for Roth IRAs, but you may take withdrawals tax-free, again depending on your age and holding-time requirements.

Inherit the IRA
As the beneficiary of an inherited IRA, no matter what your relationship to the deceased is, you can move the IRA assets into an account in both the deceased’s name and your name and deplete the assets over a fixed period. You cannot make further contributions to the IRA, nor can you roll the assets over into another IRA. However, you can transfer the assets between financial institutions. It is possible that with an inherited IRA, you will have to pay federal income tax on distributions, but there is no penalty on distributions taken before you reach age 59 ½. You may also name a beneficiary of your own for this account.

If the deceased had not yet taken required minimum distributions, you can take the distributions based on your life expectancy or by December 31 of the fifth year after the year of the deceased’s death. If the deceased had begun taking distributions, you must deplete the IRA’s assets as quickly as the distribution method the deceased was using. However, if you are the deceased’s spouse, you may delay taking distributions until the year in which your deceased spouse would have reached age 70 ½.