Naming a beneficiary over your IRA is a key step in the estate planning process. It’s a way to ensure the wealth you’ve accumulated throughout your working years goes to the beneficiary you designate. This can be your spouse, children, grandchildren, trusts or even charities and other organizations. Nonetheless, it’s a decision that should be made with care and understanding, because the rules are complex, and any mistakes in the process can be costly.
Before diving into designating beneficiaries, it’s important to understand what an inherited IRA is. An inherited IRA, or beneficiary IRA, is an account that is opened when a beneficiary inherits an IRA or employer-sponsored retirement plan after the original owner dies. A beneficiary can open one of these accounts using proceeds from any type of IRA including traditional, Roth, SEP and SIMPLE IRAs. However, in most cases, once the original owner of an IRA has died, the assets must be transferred to a new account in the beneficiary’s name.
