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Inherited IRAs

Posted: May 2, 2008 1:54 a.m.
Updated: July 3, 2008 5:02 a.m.
When an IRA owner dies, a designated beneficiary, who is an individual, can establish an inherited IRA and start taking required minimum distributions (RMDs) over the beneficiary's own life expectancy. By spreading out the death benefit, a beneficiary can reduce current income tax liability by not taking a lump-sum distribution and will enjoy continued tax deferral on the asset s remaining in the inherited IRA.

Distributions are treated as death distributions and are not subject to a 10 percent federal tax penalty for premature distribution.

Rules for spouses
When a spouse is the beneficiary of an IRA or other qualified plan, an additional death benefit distribution option is a rollover into an IRA in the surviving spouse's name, and the surviving spouse becomes the IRA owner.

Rules for non-spouses
The Pension Protection Act permits a direct trustee-to-trustee transfer (a direct rollover) from a qualified plan to an inherited IRA for the benefit of a non-spousal beneficiary. Plans may offer this rollover opportunity but are not required to do so.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment. His column represents his own views and not necessarily those of The Signal.


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