The Rules of Payable-on-Death IRA Beneficiaries
Your IRA beneficiaries don't have to wait on probate to inherit. IRAs are set up to bypass probate: When you die, your beneficiaries get the money. Even if your will says your spouse or your child inherits everything, that doesn't stop your IRA beneficiary from inheriting the account. As all IRAs are payable on death, the rules are the same for beneficiaries across the board.
If your beneficiary isn't your spouse, he has two options. One is to empty out the inherited account over five years. He can make withdrawals on any schedule as long as there's nothing left five years after your death. The alternative is to roll over the money from your account into a new IRA identifying him as your beneficiary. He then takes an annual minimum withdrawal based on the size of the account and how many years the IRS expects him to live. The IRS life-expectancy tables are in the appendix to Publication 590.
If your spouse is the only beneficiary, she can choose the same options as other beneficiaries, but she doesn't have to. Unlike other beneficiaries, she can postpone withdrawing money until you would have turned 70 1/2, the age mandatory minimum withdrawals kick in. She can also choose to treat the account as if she'd opened it herself. That lets her contribute more money to the IRA and postpone withdrawals until she turns 70 1/2 herself.
The IRS treats beneficiary withdrawals from a traditional IRA just as if you'd taken out the money in retirement. Withdrawals are taxable income, lumped in with salary or wages and taxed at the beneficiary's usual rate. If a percentage of your account is made up of after-tax contributions, that percentage of withdrawals is tax-free. All withdrawals from an inherited Roth are tax-free, provided the account has been open at least five years.
If you're married and live in a community property state, half of what you contribute to the IRA is community property. Some states won't let you leave it to someone besides your spouse without his written consent. If you name your spouse, then get divorced, pick a new beneficiary promptly. Otherwise your ex may be the one who gets the money when you die. It's smart to name a primary and an alternative beneficiary. That way if your beneficiary dies before you or with you, someone else gets the money probate free.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.