An individual may own an Individual Retirement Account, or IRA, via inheritance from a deceased spouse or another person that made him the beneficiary of such account. Like many other types of investment accounts, an IRA is governed by certain rules and regulations in order to serve as guidelines for the account holders. Understanding the IRA rules is essential so that the investor or account holder will know how to manage their accounts properly. If a person inherits an IRA from a deceased spouse, certain inherited IRA rules must apply.
The spouse beneficiary can choose what he or she wants to do with his or her inherited account from two options:
- Do a spousal rollover, which means that the beneficiary will rollover the inherited account to his or her own IRA, and manage such like he or she is the owner.
- Continue owning the account as a beneficiary.
There is no deadline for spousal rollover; thus, the spouse beneficiary can opt to continue owning the account as a beneficiary and enjoy its benefits, and then decide to do a spousal rollover later on.
If the spouse beneficiary decides to continue to handle or own the account as a spouse beneficiary, there are certain rules that must be considered. One, there is no 10% early withdrawal penalty for withdrawals taken by the beneficiary, even if he or she has not yet reached the age of 59 and 1/2 . Two, if the inherited account is a Roth IRA, all withdrawals will be subject to tax if the account has not lapsed the 5-year holding period, with no more than 10% early withdrawal penalty to be paid. Three, if the account is a traditional IRA, the beneficiary will have to start taking the minimum required distribution in the same year that the original owner is supposed to take them, but the minimum amount will be based on the life expectancy age of the beneficiary. The goal for this rule is to zero out the account and pay all the taxes before the beneficiary reaches his or her life expectancy age.
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