An IRA inheritance is a retirement plan that is bequeathed when the holder of an IRA dies. When an IRA is established, the account holder is required to name a beneficiary for the account upon the holder's death. This beneficiary can be a person, such as a spouse, family member, or friend, but it might also be an entity, such as an estate.
IRA stands for individual retirement arrangement or individual retirement account. It is a retirement plan in the United States that allows the holder to put money into an savings plan while minimizing the tax burden on that money. Generally, these accounts are invested in securities such as stocks and bonds. The goal of IRAs is to encourage taxpayers to set aside retirement money.
In the case of an IRA inheritance, there are two main options for the inheritor. The simplest option is to take the money in the IRA as a lump sum. This will require paying taxes on the amount, which, in some cases, may move the inheritor into a new, higher tax bracket. The other option in an IRA inheritance is to open an Inheritance IRA. The deceased's IRA will then be rolled over into this new account, allowing the account to continue to grow without requiring the inheritor to pay tax on the account.
If an IRA is bequeathed to a spouse, that spouse will often have the option of adding the assets of the deceased's IRA to their own retirement plan. This allows them to avoid immediately paying taxes on the money, while having all of the money in one place. The option to add an IRA to an existing plan is only available to the deceased's spouse.
The rules involving the withdrawal of money from an IRA inheritance can vary based on the age of the deceased and the expected life span of the inheritors. Generally, a inherited IRA will pay out a certain amount of money to the inheritor on a yearly basis. In some cases, an inherited IRA can be arranged so that the beneficiary receives the entire sum of the IRA within five years of the benefactor's death.
There are several different types of IRAs that can be inherited. In a traditional IRA, the holder places money into the account, then subtracts the amount placed into the account from their taxable income. These contributions are thus considered "pre-tax". The holder of this IRA will pay taxes when withdrawing from the retirement account. If withdrawals are made after the account holder has retired, he or she will often be in a lower tax bracket than during his or her working years, allowing them to pay less tax than they would have.
With a Roth IRA, the account holder places money that has already been taxed into an account. The account holder can then withdraw money from the account without paying taxes on it. There are also fewer restrictions and penalties associated with withdrawing money from a Roth IRA than a traditional IRA.
IRA inheritance can also come in form of an employer-sponsored retirement plan, such as a 401(k) plan. These retirement plans allow employees to contribute money pre-tax into an account managed and paid for by their employer. Often, an employer may offer to match a certain percentage of contributions to this plan to long-term employees.