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Vanguard - inherited IRA - nonspouse as beneficiary | Vanguard

Inherited IRA—nonspouse as beneficiary

 
 
  
 

Understanding your options as a nonspouse beneficiary is very important, and you need to factor in the tax considerations for each option. For example, you may want to keep the IRA assets growing tax-deferred as long as possible for yourself or for future generations. Or you may need the funds now and want to take a lump-sum distribution—in which case there are immediate tax consequences. Consider your decisions very carefully, because some may be irrevocable.

Understanding your options

A nonspouse beneficiary has four options when receiving an IRA inheritance: inheriting the IRA, taking a lump-sum distribution, disclaiming the IRA, or electing Vanguard's pass-through service. Each option has its own tax consequences and some options are irrevocable. We strongly suggest consulting a qualified tax professional or attorney to determine the best course of action for your particular situation.

Inheriting the IRA
You may choose to inherit the IRA, which enables you to keep the assets growing tax-deferred. When you inherit an IRA, you take the IRA account as a beneficiary (for your benefit) and withdraw from it over a fixed period of time without a tax penalty, regardless of age. Even if you're under age 59½, you will not be subject to an "early withdrawal" penalty from the IRS.

Taking a lump-sum distribution
You may decide to take a lump-sum distribution after the assets are transferred into your name. These funds can then be deposited into your Vanguard non-IRA account, or sent to you directly. However, you'll lose the benefits of tax-deferred investing. Also, since you must report the distribution to the IRS as ordinary income for the year in which you received it, there can be negative tax consequences to you—depending on your specific situation—especially if the distribution is a significant amount.

Options for special circumstances

The following two options are applicable in special situations. We strongly suggest consulting a qualified tax professional or attorney to determine the best course of action for your particular situation.

Disclaiming the IRA
You may refuse to accept ownership of the IRA assets, either in part or in full. The assets refused will then pass to any remaining primary beneficiaries or, if none exist, to any secondary beneficiaries. The decision to disclaim assets is an irrevocable election with special rules.

Pass-through service
Some special options may be available to you if the original account owner designated a trust for your benefit or the owner's estate is the IRA beneficiary. If you're the designated beneficiary of an IRA through a trust (or the IRA owner's estate), you can take advantage of Vanguard's pass-through service. With proper authorization from the trustee of the designated trust or, the authorized representative of the account owner's estate designated as beneficiary, we'll transfer the assets to an account in your name.

For both of the above options, in addition to consulting with your own advisor, you'll also need to contact Vanguard to discuss the necessary documents and instructions needed.

 
 
 
 

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Related topics

Understanding RMDs
Special rules

   

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