How Do I Title a Beneficiary IRA?

An incorrectly titled IRA can cost you on your taxes.

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Moving funds to a beneficiary IRA from an inherited retirement account, such as an individual retirement account, 401(k) or 403(b), allows you to stretch out distributions over a longer period of time -- you can take greater advantage of the tax-sheltered growth provided by IRAs. However, if you don't title the account properly, you could find yourself sharing more than you intended with the Internal Revenue Service.

Titling Basics

A beneficiary IRA must be titled in the decedent's name for the benefit of the beneficiary. However, there's not a single, specific format for the name. For example, say you inherited an IRA from your brother, Jonathan Jones, and your name is Kenneth Jones. When you re-title the account, you could name it "Jonathan Jones, deceased, for the benefit of Kenneth Jones," but "Jonathan Jones, beneficiary Kenneth Jones" would also work.

Transferring Money

If you want to move money from an inherited retirement account, such as a 401(k), into a beneficiary IRA, you must use a direct transfer. With a direct transfer, you tell the first plan administrator where to move the money and the money gets moved straight into the beneficiary IRA without being paid to you first. If you try to do a rollover, where you take a distribution from the first account, you won't be able to complete it. Once the money is out of an inherited account, you can't put it back in unless you're the decedent's surviving spouse.

No Commingling

You must set up a separate beneficiary IRA for each person you inherit retirement plans from because of the different required distributions you must take. For example, say you inherit one 401(k) from your uncle and an IRA from your aunt. You're not allowed to combine the funds from both accounts into just one beneficiary IRA. But, if you want all of the money to be held by one financial institution, you could set up two beneficiary IRAs at the same bank.

Incorrect Titling Effects

If you don't title the IRA correctly and it's treated as your own IRA, or you take the money out of one account and try to redeposit the money into the beneficiary IRA, the IRS treats you as taking a permanent distribution from the retirement account and making a distribution in your own account. This hurts you in two ways. First, if you're withdrawing from a traditional inherited account, like a traditional IRA or 401(k) or 403(b), you must pay income taxes on the withdrawal. Second, the amount that you put in your own IRA counts against your annual contribution. Any amounts over your limit are hit with a 6 percent excess contributions tax penalty unless you correct it by your tax filing deadline.