IRAs were created to help people save enough to meet their financial needs in retirement. However, some people pass away before they've completely used up their IRA funds. Madison.com’s recent post asks this question: “What Happens to an IRA When Its Owner Passes Away?” In response, the article advises first determining who inherits the IRA assets. The answer is on the beneficiary designation form that the IRA owner completed—it controls who gets the IRA, even if it conflicts with a will or other estate planning documents.
In some limited circumstances, the IRA owner’s will controls who receives IRA funds. But when? What if the IRA beneficiary form wasn’t filed, it doesn't list a valid beneficiary or the form lists the estate as the beneficiary?
Beneficiaries inheriting an IRA have a few options. If the decedent hadn't yet turned 70½, then the beneficiaries can withdraw the entire balance of the inherited IRA within five years. If it’s a traditional IRA, then the beneficiaries pay income taxes on the amount they withdraw in the tax year when they withdraw the funds.
Another alternative: the IRA heirs can start taking regular distributions on an annual basis, using a life expectancy calculation like what IRA owners use when they turn 70½ and must take required minimum distributions from the account. This "stretch IRA" option has the greatest potential tax savings, especially if the heir is young.
In addition to these options, a surviving spouse who inherits an IRA has another option. Instead of treating the deceased spouse's IRA as a separate account, the surviving spouse can roll the assets over into an IRA in the surviving spouse's own name. The inherited assets are then treated the same way as any other IRA assets that the surviving spouse might already have owned.
Finally, be certain that the financial institution handling the IRA makes changes to the registration of the account to reflect whatever decision is made.
Reference: Madison.com (February 18, 2017) “What Happens to an IRA When Its Owner Passes Away?”