The Designated Beneficiary
The IRA owner can designate one or more beneficiaries on the proper form. The final designated beneficiaries before the death of the owner inherit the IRA.
Choosing a Beneficiary
An IRA owner can specify more than one beneficiary, but he has to state what percentage of the IRA each beneficiary will receive. The IRA owner can change his mind about his beneficiaries at any time. If the owner doesn't name a beneficiary, the IRA benefits automatically go to his estate.
Rules for Spousal Beneficiaries
If a spouse inherits the IRA, she can either accept the IRA or roll it over into her own IRA. Per Internal Revenue Service rules, a spouse can treat the IRA as hers only if she is the sole beneficiary of the IRA. She can contribute to the IRA and has the right to withdraw unlimited amounts.
Rules for Non-Spousal Beneficiaries
Non-spousal beneficiaries cannot roll over the inherited IRA into an existing IRA. Moreover, they must take minimum distributions, or withdrawals, from the IRA per year.
Distribution Rules for Non-Spousal Beneficaries
IRS rules dictate that non-spousal beneficiaries may cash in the IRA five years after the IRA owner's death, or have the IRA distributed to them in smaller amounts for the rest of their lives. Spousal and non-spousal beneficiaries pay taxes on their IRA withdrawals as part of their income tax, unless the IRA is a Roth plan. which provides tax-free distributions.