Inherited IRA Rules

There are several types of IRA but let us look into the type most Americans opt to have – the Roth IRA. Several rules govern this type of account and most are from the IRA basics like contribution rules, and distribution rules.

IRA Contribution Rules

Roth IRA contribution limits 2011 are very simple. Every working individual who receives salaries, wages, bonuses, professional fees and even tips can contribute to a Roth IRA account as long as they don’t exceed the income limits set for IRA filers. Contributions can amount up to a maximum of $5,000 and for account holders that are above 50 years of age will enjoy a catch up limit of $1,000 for a total of $6,000. For full contribution to Roth one should not have an income more than the limits specifically set for each individual. Roth IRA income limits are as follows:

• For single filers, head of households and married couples filing separately and not living together will have a modified adjusted gross income (MAGI) limit of $107,000-$122,000.
• A MAGI limit of $169,000-$179,000 will be for joint filers.
• Married couples filing separately and living together should not exceed and MAGI of $10,000 as their limit.

IRA Distribution Rules

Qualified distributions are those first made at least after 5 tax years from the establishment of Roth IRA account. The first withdrawal out of your Roth should not be earlier than reaching the age of 59 ½. These rules should be followed accordingly otherwise you will be charged a 10% early withdrawal penalty.

Now I will give you a little scenario. Let’s be realistic. Individuals invest on opening an IRA account to prepare for life after retirement. By the time they retire and start taking money out of their account they will be at an age where their body is susceptible to illness and diseases and eventually die or God forbid fatality due to accidents. What happens now to their account? No need to worry much because it may be tricky but one can still benefit from it through inheritance.

Inherited IRA rules may not be as simple as Roth IRA rules but it is still important to invest time if you want to get returns out of your inherited IRA account. In this regard let us stress some several points.

1. Beneficiary Form – This is perhaps the most important thing with inherited IRA’s. Failing to name a beneficiary upon opening an IRA would likely hinder your supposed to be beneficiaries to stretch their inherited IRA over their lifespan. Contact your IRA company and they will be able to provide you with the IRA Beneficiary form.
2. Other Assets – Inherited IRA can never be combined with your other assets. Different types of IRA accounts could not be commingled as well. But if you inherit several IRA’s from one person then it can be combined into one inherited IRA. If in case you inherit several IRA’s from different persons then know that combining it is not permitted.
3. Decedent’s Name – The amount will still be not taxable if in case the decedent’s name is excluded. Although the IRS requires that inherited IRA’s should be registered under the decedent and the beneficiary, such errors can easily be corrected by just adding the decedent’s name upon registration.
4. Early Withdrawal – With inherited IRA’s 10% penalty is not applicable. It wouldn’t matter how old you are or when you first take out money from your inherited IRA.
5. 60-Day Rollover – If you withdraw money from your IRA and returned it after 60 days then you will not be taxed. But this does not apply with inherited IRA’s. All withdrawals will be taxed. Make sure to follow the IRA rollover rules to avoid any fees & penalties.

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