If an IRA owner dies and you are the beneficiary, you have several options.
* You can take out all the money in the account if you need the cash. However, you’ll owe tax on the withdrawal. In addition, you’ll forfeit the opportunity to build wealth, tax-deferred, over many years.
* If you are a surviving spouse, you can roll over the IRA to your own IRA. Then you can name your own beneficiaries and establish a plan for stretching out distributions.
* Otherwise, you can become a designated beneficiary of the inherited IRA. Those beneficiaries are established on September 30 of the year after the death of the IRA owner.
Say Tom Williams dies in 2011, leaving his $100,000 IRA equally to his wife Sarah and his son Rick. If Sarah rolls $50,000 (half the account) to her own IRA by September 30, 2012, Rick will be the designated beneficiary of Tom’s IRA, now worth $50,000. Rick will have to take required minimum distributions (RMDs) over his life expectancy but he can keep the rest of the account intact, for extended tax deferral.
* If the deceased IRA owner had named more than one beneficiary, those beneficiaries have until December 31 of the year after the IRA owner’s death to separate the account into multiple inherited IRAs. With separate inherited IRAs, each individual has the chance to stretch out RMDs over his or her life expectancy.