Naming Beneficiaries for Inherited IRAs: What You Need to Know

The rules for how to handle an inherited IRA differ depending on the beneficiary, and you should also consider the tax implications of required minimum distributions (RMDs).

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Naming a beneficiary over your IRA is a key step in the estate planning process. It’s a way to ensure the wealth you’ve accumulated throughout your working years goes to the beneficiary you designate. This can be your spouse, children, grandchildren, trusts or even charities and other organizations. Nonetheless, it’s a decision that should be made with care and understanding, because the rules are complex, and any mistakes in the process can be costly.

Before diving into designating beneficiaries, it’s important to understand what an inherited IRA is. An inherited IRA, or beneficiary IRA, is an account that is opened when a beneficiary inherits an IRA or employer-sponsored retirement plan after the original owner dies. A beneficiary can open one of these accounts using proceeds from any type of IRA including traditional, Roth, SEP and SIMPLE IRAs. However, in most cases, once the original owner of an IRA has died, the assets must be transferred to a new account in the beneficiary’s name.

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Patrick M. Simasko, J.D.
Partner, Simasko Law

Patrick M. Simasko is an elder law attorney and financial adviser at Simasko Law and Simasko Financial, specializing in elder law and wealth preservation. He’s also an Elder Law Professor at Michigan State University School of Law. His self-effacing character, style and ability have garnered him prominence and recognition throughout the metro Detroit area as well as the entire state.