How are Inherited IRAs of Dead Beneficiaries Handled?

Inherited IRA contingent beneficiary
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Inherited IRAs are more complicated under the SECURE Act.

When you started working, you opened an Individual Retirement Account (IRA).

Over the years, you have placed money in this account, and it has grown in value through that miracle of deferred compound interest.

What if there are funds in the account when you die?

According to a recent nj.com article titled “Who gets this inherited IRA after the beneficiary dies?,” there are several rules governing the inheritance of a traditional IRA.

An inherited IRA should have a contingent beneficiary.
You should name a contingent beneficiary for an inherited IRA.

Because IRAs are transferred typically through a beneficiary form, it is essential for you to record a name on the beneficiary form.

The person named as the beneficiary will directly receive the money when you die without probate.

In the past, beneficiaries could make withdrawals from inherited IRAs throughout their lifetimes.

This was known as a “stretch” IRA.

However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act placed restrictions on withdrawals from these accounts.

What is stipulated under these new rules?

There are five categories of individuals who are considered eligible designated beneficiaries

Charities, estates, and most trusts can inherit IRAs, but they will be considered non-designated beneficiaries when it comes to making withdrawals.

If you designate a person as the beneficiary and he or she dies before they inherit and no contingency beneficiary is named, then things can become complicated.

When you die, the executor of the estate for the beneficiary will need to open an inherited IRA account.

Once the account is open, the executor will need to determine who will receive the Inherited IRA.

Often the documents for the financial institution governing the IRA determine who will be the default beneficiary if no one has been named.

Bottom line: it may not be anyone you would have designated!

To avoid these complications with inherited IRAs, you should designate a primary beneficiary and a contingent beneficiary in case the first beneficiary dies before you and subsequently fail to update your documents.

Reference: nj.com (June 1, 2021) “Who gets this inherited IRA after the beneficiary dies?”

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