Many Arizona residents include individual retirement accounts in their estate plans. These tax-deferred accounts allow people’s savings to grow without being taxed until they reach age 70 1/2 or begin making withdrawals. Because of this, people who make regular contributions to their IRAs throughout adulthood can save significantly, depending on whether they make the maximum annual contributions and the investments they choose. When someone dies with an IRA and leaves it to someone else, the rules for handling an inherited IRA depend on the beneficiary’s relationship with the original account holder.
What is an IRA?
An IRA is a tax-deferred retirement savings account. People make contributions on a pre-tax basis and will not have to pay taxes until they begin making withdrawals. An individual with an IRA can’t make withdrawals until they reach age 59 1/2 without being penalized. The account holder must begin taking minimum required distributions when they reach 70 1/2 of 4% of the account balance. When someone with an IRA passes away, the IRA will pass to the named beneficiary of the account. The beneficiary will have rules for what to do with the IRA defined by the Internal Revenue Service (IRS).
Rules for Inherited IRAs
If you inherit an IRA, you will need to follow the IRS rules for how you handle it. The rules differ based on whether you are the surviving spouse of the deceased owner, their children, or a third party. The rules for surviving spouses are the least restrictive. A spouse can treat the account as if it were their own and name themselves as the owner, roll it into another qualified account and treat it as if it was their own, or act as if they are the beneficiary of the IRA.
If you are the deceased owner’s minor child, are disabled, or a dependent who is less than 10 years younger, you can either open an inherited IRA in your name and take RMDs over your lifespan or the expected lifespan of the original owner. Your other option is to make withdrawals over 10 years, and you must liquidate the account by Dec. 31 of the 10th year. If you are a beneficiary who doesn’t fall into either of these categories, your sole option is to take distributions over 10 years.