How to Inherit an IRA From a Parent

Although an Individual Retirement Account is designed to supplement retirement income for the account owner, IRAs have become a large estate planning vehicle. The IRA itself avoids probate with assets required to go to a spouse in most states unless a waiver is signed. When money passes on to children, the option to take the entire distribution, disburse payments over five years or to open a beneficiary IRA exists. While the entire IRA value is included in the estate for transfer tax purposes, beneficiaries can reduce income taxes over time with these other options.

Step 1

Look at your financial situation and the financial situation of the entire estate. Consider how much in estate taxes will be owed and whether the IRA assets will be needed to pay them. Also consider your personal income scenario and see how adding the income from the IRA distribution will affect you.

Step 2

Call the IRA custodian and request a beneficiary distribution form. You may be required to verify who you are and that you are the rightful beneficiary or authorized proxy for the estate.

Step 3

Open a beneficiary IRA at the custodian of your choice (bank, brokerage or insurance company) if you elect a beneficiary IRA. You can use the same custodian your parent's IRA was held at for simplicity as well. Make sure the custodian titles the IRA as a beneficiary IRA with your parent's name and date of death.

Step 4

Fill out the beneficiary distribution form and include a death certificate to the IRA custodian. The form will ask you to make your beneficiary elections. Choose the lump sum distribution, the five year distribution or beneficiary IRA. Lump sum and five year elections start immediate check distributions.

Step 5

Include an IRA direct rollover form with the beneficiary distribution form. Make sure the rollover form has the account number and new custodian address where the funds should be sent.

Tip

A tax adviser can help you properly evaluate the tax liabilities of the inheritance.

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