Learning beneficiary IRA rules can help you avoid any problems with how an IRA withdrawal is handled. The IRA has very specific rules about how beneficiary payments are handled. Here are the basics of IRA beneficiary rules and how to handle them.

Naming Beneficiaries

When you own an IRA, you should name a beneficiary for your account as soon as possible. If something happens to you without a beneficiary named, the process of getting the funds where they need to go can be tricky. Naming a beneficiary eliminates any doubt as to what should happen with the funds. You can even name multiple beneficiaries if you want. For example, you could put your spouse and your children as beneficiaries of the account. In that case, you will need to specify a percentage of the account that each beneficiary will receive as well.

You do not have to name a beneficiary on your IRA until you reach the age of 70 1/2. At that point, the government requires you to name someone as a beneficiary. You are also free to change your beneficiaries at any time. If something in your personal life changes and you want to remove or add a beneficiary, it is as simple as filling out a form with your IRA custodian. 

Inherited IRA

When the owner of an IRA passes away, the beneficiary will then gain ownership of the IRA. However, they may not be able to cash it in immediately without paying a penalty. In most cases, the money will be transferred to a new IRA account known as an inherited IRA. These are also sometimes referred to as beneficiary IRAs. This is a new account in the beneficiary's name and gives them control over the funds but not immediate access to them. Doing this transfer into a new IRA will allow the funds to keep their tax-advantaged status and prevent any large tax bills. 

Spousal Inheritance

If the beneficiary of the IRA is a spouse, they also have another choice. They are free to put the money into an inherited IRA. However, they can also treat the money in the IRA as if it was theirs. They can transfer the money from the original IRA into their IRA without any penalty. Then the money is officially part of their account and normal IRA rules apply. Once they reach the age of 59 1/2, they are free to start taking withdrawals from the account. Once they reach the age of 70 1/2, they are required to take a minimum distribution each year. 

Contributions

With an inherited IRA, you should also know that contributions to the account are not allowed. Therefore, if you wanted to keep depositing money into the account, you would not be able to. You can only withdraw from an inherited IRA. If you are a spouse, you can roll the funds into your IRA and continue making contributions. Otherwise, you would not be able to do so.

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