An inherited IRA, also commonly referred to as a beneficiary IRA, is established when an individual inherits an IRA following the original IRA owner's death.
The beneficiary of the IRA can be any person (or entity) designated by the original accountholder as allowable by the IRS. As a beneficiary, one cannot contribute additional funds annually to an inherited IRA. However, the assets within the account will retain their tax-deferred status, may become tax-free under specific circumstances, or may be rolled over into a new IRA. The options available to the beneficiary depend on the type of beneficiary designated on the account. It is crucial for IRA accountholders to regularly update beneficiary contact information and accurately specify the beneficiary designation to ensure that their IRA transfers according to their wishes and avoid getting caught up in lengthy litigation to determine its outcome.
SECURE ACT 2.0 Updates to Beneficiary Titles
The SECURE ACT 2.0. became law on December 29, 2022, and impacted beneficiaries of IRAs among other things. The titles "Primary" and "Contingent" retained their respective titles and roles, while the title "Designated Beneficiary" no longer exists. Here is what you should know:
Beneficiaries were categorized into groups based on their need for the funds following the passing of the IRA owner:
- Eligible Designated Beneficiary (EDB) includes surviving spouses, disabled or chronically ill individuals, individuals not more than 10 years younger than the IRA owner, and children of the IRA owner who have not yet reached the age of majority.
- Designated Beneficiary (DB) encompasses adult children of the IRA owner, family members, friends, and other individuals.
- Non-Person Beneficiary (NPB) comprises estates, qualified trusts, and charities (must be a qualified 501(c)(3) entity).
Quick Reference Guide
For additional information, refer to IRS.gov and/or download STRATA's Distribution Options: IRA Guidelines to overview beneficiary distribution options and key terms.
Questions
For questions regarding tax implications or advice on what makes sense for your circumstances, connect with your tax, legal, or financial professional. For information regarding a STRATA IRA account or to make a beneficiary claim, reach out to STRATA's Beneficiary Concierge team at 866-891-8264 and review What Do IRA Beneficiaries Need to Know? (link once article is published).