If the IRA account holder died without a designated beneficiary, the IRA assets will be paid to the deceased's estate. The IRS requires that named heirs take the full distribution out of the account within five years. In the case of inheritances subject to wealth tax, the heirs of an IRA will receive an income tax deduction for wealth taxes paid into the account. Taxable income earned (but not received by the deceased) is called “income with respect to a deceased.” Opening one of these accounts transfers the deceased's assets to the new beneficiary.
They can spend the money on whatever they want, but they can't make any new contributions to the inherited IRA. The decision to relinquish IRA assets must be made within 9 months after the death of the original owner of the IRA and before you take possession of the assets. If the original owner of the IRA left a percentage of his IRA account to more than one beneficiary, it is important to set aside his share of the IRA from the deceased in his name and then complete his first RMD by December 31 of the year following the death of the original owner of the IRA. If you inherit a Roth IRA as a spouse, you have several options, including opening an inherited IRA.
If you are the child, grandchild, sibling, distant relative, or even close friend of the owner of an IRA who has named you a beneficiary, it is critical that you and the owner of the IRA understand the rules governing IRA inheritances. As a non-marital beneficiary, if you decide to transfer assets inherited from the original owner's IRA to an inherited IRA in your name, the assets won't stay in your inherited IRA forever. As a non-marital beneficiary, you don't have the option of transferring inherited IRA assets to your own IRA. If you receive a check, the money will generally be taxed as ordinary income and cannot be deposited in an inherited IRA that you may have at another company, nor can it be redeposited in the inherited IRA from which it was first withdrawn.
An inherited IRA is an individual retirement account that is opened when you inherit a tax-advantaged retirement plan (including an IRA or a sponsored retirement plan, such as a 401 (k)) after the owner dies. It is important to note that the IRA's income tax treatment remains the same from the original account to the inherited IRA. Any type of IRA can become an inherited IRA, including traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs. These rules don't apply if you've simply transferred another IRA to your own IRA, but are specific to inherited IRAs.
You'll need to pay taxes on withdrawals from your inherited IRA if the funds in the original IRA account are classified as tax-deferred.