What Happens to Your IRA When You Die?

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When an individual passes away, the fate of their Individual Retirement Account (IRA) depends on the designated beneficiaries and the specific rules that govern different types of IRAs. Here’s a breakdown of what generally happens to an IRA upon the account holder’s death:

Beneficiary Designations

• Primary and Contingent Beneficiaries: IRAs are transferred directly to the named beneficiaries, bypassing the probate process. It is crucial for IRA holders to keep their beneficiary designations up to date to ensure the account is passed on as intended.

Types of Beneficiaries

• Spousal Beneficiaries: Spouses who inherit IRAs often have the option to treat the IRA as their own, which includes the ability to delay distributions based on their own age, and in some cases, continue contributing to the IRA.
• Non-Spousal Beneficiaries: Non-spouse beneficiaries, such as children or other relatives, generally cannot treat the IRA as their own. Instead, they may be required to take distributions over a 10-year period, especially under the SECURE Act rules that came into effect in 2020.

Types of IRAs and Tax Implications

• Traditional IRAs: Beneficiaries must consider required minimum distributions (RMDs) and the associated tax implications. Distributions are typically taxed as ordinary income.
• Roth IRAs: Beneficiaries can inherit these accounts tax-free as long as the account was opened at least five years before. Roth IRAs also require distributions within a 10-year period, but these are generally tax-free.

Disclaiming an Inheritance

Beneficiaries may choose to disclaim their inheritance (decline to receive it), in which case the IRA will pass to the contingent beneficiaries.

No Beneficiary Designation

If no beneficiary is designated, the IRA will likely be included in the estate and be subject to the terms of the will, or state intestacy laws if there is no will. This can lead to less favorable tax treatment and distribution schedules.

Trust as a Beneficiary

If a trust is named as a beneficiary, the distributions will depend on the terms of the trust. It’s important to ensure the trust is properly structured to avoid undesirable tax consequences.

Conclusion

Handling an IRA after death can be complex and varies based on many factors including the type of IRA, the beneficiary’s relationship to the decedent, and how the beneficiary wants to manage the inherited funds. It’s advisable for IRA holders and potential beneficiaries to consult with financial advisors and estate planners to understand the best options available and to ensure that all legal and financial outcomes are appropriately managed.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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