How do you pass along your IRA to children or other beneficiaries after your death? Anyone (except for a widow or widower) who is a named beneficiary of an individual retirement account has to re-title the account to defer taxation on it. Re-titling the account is well worth the effort: You get to stretch out withdrawals across your life expectancy, delay the tax bite and potentially increase the investment’s value as it grows tax free until withdrawal at a much later time.
There is no official deadline for such re-titling, but practically speaking, you need to do it by the deadline for taking annual distributions from the IRA on December 31 of the year following the year in which the original IRA owner died.
If you have more than one heir that you wish to be equal beneficiaries of your IRA, you do not have to separate your IRA into one IRA for each beneficiary. An IRA with two or more designated beneficiaries can be divided into separate accounts, with each of the new accounts being re-titled. Once the account is split up, each beneficiary can use his or her own life expectancy to take the required withdrawals each year.
Each child or beneficiary can choose his or her own way of inheriting an IRA. In other words one child take a lump sum outright, and the others elect to spread withdrawals over their lifetimes. Separating the accounts gives each beneficiary autonomy to make their own choice.
It is important to note that if the original IRA owner already had started taking required minimum distributions, which begins no later than age 70½, you need to determine whether he or she had taken a distribution in the year of death. If not, the beneficiaries need to make the owner’s withdrawal by December 31 of the year of death-or pay a 50% penalty on the required withdrawal amount.
The rules are basically the same for inheriting Roth IRA’s from which heirs have to take withdrawals, but you don’t have to worry about the owner’s distributions, because none would have been required. Other retirement plans-including 401(k)’s, 403(b)’s and Keoghs, often have stricter rules, and it’s common for them to require a cash-out when the owner dies.