A Traditional IRA creates several complicated questions for beneficiaries, many of which have severe tax implications. In Illinois, beneficiaries have three options for inherited Traditional IRAs.

Protect Tax Deferred Assets

Beneficiaries who can afford to wait to claim their inheritance benefit greatly from continuing the tax deferred status of the account. By not touching the money, the initial deposit will keep growing, providing the beneficiary with a sizeable return on the account when he or she is ready to retire. An estate planning attorney can help beneficiaries walk through their options for protecting the funds.

During the transfer of control over the accounts, a spouse may choose to roll the funds over into the beneficiary’s account, or keep the money in the original account. Rolling the funds over allows the beneficiary to push back the date of required minimum distributions (RMD) and it enables beneficiaries to pass along more of the money to the next generation.

Spouses under 59 ½ may choose to keep the money in the original account and take distributions without penalty, because the account is an inherited account. Leaving the money in the original account is the only option available for non-spouse beneficiaries.

Taking A Distribution

A beneficiary may opt to take some or all of the IRA’s assets through a distribution of the account. Taking a distribution ends the tax deferred status of the account, and may cause serious tax complications for the beneficiary. Money that is withdrawn early must be taxed at the current year’s tax rate, and will be added to the beneficiary’s taxable income for the year. In some cases, the amount may be enough to push the beneficiary to a new tax bracket.

Disclaiming The Funds

In some extreme circumstances, a beneficiary may choose not to accept the funds or access to an inherited account. Known as disclaiming the funds, this decision returns control of the assets to the estate, and the person disclaiming the funds has no say in where the funds go. Beneficiaries have up to nine months after the account holder’s death to disclaim the funds.

In estates with substantial assets in IRAs, an estate planning attorney is necessary to demonstrate options to all potential beneficiaries. Choosing an option blindly, without the assistance of an estate planning attorney, could have long-term financial ramifications for beneficiaries.