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IRAOne of the largest assets that people have are IRAs.  IRAs can be passed on to descendants, and they are therefore one of the largest inherited assets.  IRAs are such large assets because they grow tax free until you begin to take distributions out of the IRA.

Your heirs who inherit an IRA have to follow the regulations or problems may occur.  Unfortunately, these rules are not easy to follow.  Your heirs want to let their IRAs grow tax-free, but a simple mistake can lose this advantage.  That means income tax liability on the entire IRA balance.  It is so important that you talk with an expert who can help you make sure that you do not undercut the purpose of your IRA.  The following are some of the options that you have with your IRA.

IRA Cash Out Option

Your heir can “cash out” their inherited IRA.  While they get full access to the IRA balance, they also have to pay full income tax on those funds.  Cashing out an inherited IRA is generally not the best option.

Spouse Options

A surviving spouse who inherits an IRA has two options: roll the IRA into a new IRA or merge it with their own IRA.  Either option continues the tax-deferred growth and the surviving spouse can keep on contributing to the IRA until they have to take distributions.

If the surviving spouse rolls the IRA over, the spouse can then name new beneficiaries of the IRA after the spouse passes away.  The spouse should name someone is a very young because it will lower the amount of the Required Minimum Distributions (which are tied to life expectancy). This will allow the IRA to grow even more over decades and be worth more.

Non-Spouse Options

In some situations, a beneficiary who is not a spouse of the original owner can create a Beneficiary IRA and begin taking withdrawals from the IRA based on their own life expectancy.  One requirement is to take that the beneficiary must start taking these distributions before the end of the year after the original owner’s death.  If the new beneficiary does not meet this requirement, the beneficiary must withdraw all of the IRA before December 31 of the fifth year after the owner’s death.  Of course, this situation is not ideal.

In the situation in which the original owner started receiving required distributions before they passes away, the non-spouse beneficiary must take distributions of the same value for the year that the owner died.  After that first year, the beneficiary can use their own life expectancy for distributions.

In this situation, the original owner’s name must be on the IRA’s title, but the new beneficiary names the new beneficiaries.  A non-spouse beneficiary cannot roll the IRA over into their own or contribute to an inherited IRA.  But the new beneficiaries can stretch out distributions and taxes.  For many, the best option is to stretch out distributions, as that allows for the balance to increase, which provide more income.