Inherited IRA - the forgotten IRA

David A. D’Ambrosio, BridgeTower Media Newswires

Individual Retirement Accounts, or IRAs, have been available to investors for many years. Although contribution and deduction limits have changed over the years, these accounts are an important piece of retirement planning. An IRA account can hold many different types of investments and can be held at a variety of custodians such as a bank, brokerage or money management firm and mutual fund companies. As IRAs have become a more integral part of planning for individuals as an investment and savings tool, this has caused the number of inherited IRAs to increase significantly as well. Due to this increase, inherited IRAs have become more and more common in today’s world; along with that, so has the importance on what rules are in place for inherited IRAs.

An inherited IRA account is exactly what the name states: an individual, other than a spouse of the account holder, is the primary beneficiary of an IRA account. A spouse who is the beneficiary of the other spouse’s IRA can be the only individual who can re-title the account in their own name into a spousal rollover account. Spousal IRAs have different rules than an inherited IRA. Relationships are one of the most important issues when dealing with beneficiaries of IRAs. Different steps and options need to be discussed when handling the beneficiary of an IRA.

Here are a few points to consider when you inherit an IRA from a non-spouse individual:

• If the primary IRA account holder was over 70-1/2 and started taking their Required Minimums Distributions (RMDs) and they die, you as a beneficiary need to continue to take minimum distributions. The distribution you must take is based on your age going forward — even if you are younger than 70 ½, which is the mandatory age individuals must start withdrawals from their IRA accounts. If you fail to take the RMD or less than the RMD amount, you may owe a 50% penalty tax on the difference. Remember, any of the withdrawals are taxed; you can take out more than the RMD without a penalty. Consider this distribution as additional income for you during the year.

• You also are not allowed to commingle an inherited IRA with your own current IRA in your name for simplicity purposes. Your IRA will need to be its own separate identity and the inherited IRA will have its own status as well.

• You also will not be allowed to combine different inherited IRAs from different owners into one single inherited IRA since the RMD calculations are done differently. An inherited IRA owner would have to take each RMD separately.

As an aside for all IRA owners: It is important to include a beneficiary if you have an IRA. You can name either an individual and/or charity organization to receive your IRA proceeds after death. A beneficiary listed on your IRA account will bypass a will since it creates a legal agreement between the account owner and beneficiary. Assets that pass directly to a primary or contingent beneficiary will avoid probate.

If you are dealing with inherited IRAs and/or are currently an account owner, please check with your tax and/or investment advisor to make sure you are following the inherited IRA rules.


David A. D’Ambrosio is an assistant vice president at Karpus Investment Management.